couple considering retirement mistakes

3 Retirement Mistakes Even Smart Investors Make

Experience is not the same as expertise. Confusing the two creates the potential for mistakes as smart investors approach retirement.

In his book Outliers, Malcolm Gladwell popularized the idea that it takes 10,000 hours of experience to become an expert in a particular field. Smart investors spend thousands of hours saving and investing during their working years. But do they become experts when it comes to retirement? Sometimes, beneath a confident façade, there can be a sneaking suspicion:

Does my knowledge about investing translate into expertise about retirement?

It takes more than time to become an expert in an activity like investing. Anders Ericsson, the psychologist whose work was featured in Outliers, defines an expert as someone who has performed deliberate practice toward a specific goal. According to Ericsson, deliberate practice involves “considerable, specific, and sustained efforts to do something you can’t do well—or even at all.”

What smart investors realize as they plan for retirement is that they have not practiced many of the skills and decisions that will be required of them. Measuring their success in distributing their wealth as income or a legacy is very different from the measure of success in accumulating. I recently wrote on this subject for Lehigh Valley Business, highlighting three of the most frequent retirement mistakes I see smart investors make. Here they are again:

3 Key Retirement Mistakes

1. Turning Savings into a Paycheck

Some smart investors will try to reach for yield and earn the 4% that their plan says that they need. Others will get too conservative and move heavily into cash, losing the potential for growth. With interest rates this low, both of these strategies have risks that might not be readily apparent. 

The method for you to turn your savings into a paycheck is as unique as your fingerprint. Smart investors should follow a “total return” income approach that relies on preservation, dividends, and interest as well as growth. You want your retirement paycheck strategy to be flexible because market performance, interest rates, and inflation are not in your control.

2. Managing Risk

Because they are tuned in to the markets, smart investors are susceptible to recency bias. Recency bias is the tendency to assign more value to recent events than to history. Smart investors are aware of what caused the last crisis and what is fueling the current bull market. Often, that means they are preparing for the wrong risks.

If you are trying to make decisions about the risks of the next 20 years of retirement using your knowledge and experience of your last 20 years of investing, you may be swayed by recency bias. Your risks change when you stop being a saver and start your distribution strategy. Smart investors need to focus on the risks of the markets and their unique risks in this new season of life.

3. Recognizing Blind Spots

The measure of success for smart investors in the accumulation years is performance. How did I do compare to an index? How did I do in comparison to my golfing buddy? Performance is easy to track and for the last thirty years, the trend has been a good one for many. Smart investors should be cautious about focusing on performance as an exclusive measure of success in retirement.

Tracking retirement success is more nuanced because retirees make trade-offs between the returns they want and the returns they need for their plan. Smart investors work with their advisors to go beyond pure performance tracking and make decisions that can improve tax efficiency, stabilize returns, and position their estates to best support their legacy. Retirement is a planning challenge with an investing component. Smart investors realize they cannot invest their way out of a planning challenge.

Finding the Right Guidance

Smart investors have accumulated a lifetime of knowledge based on experience. But at retirement age, they are faced with making new kinds of decisions where the consequences of mistakes could be high.

If you are planning for retirement, you should consider whether your expertise will support the decisions ahead. If not, there is no shame in asking for help from someone who has guided people like you through similar decisions.

Ericsson describes the value of a guide or counselor when you have a goal and the stakes are high:

“…You wish to climb a mountain. You’re not sure how high you want to go—that peak looks an awfully long way off—but you know you want to get higher than you currently are. You could simply take off on whichever path looks promising and hope for the best, but you’re probably not going to get very far. Or you could rely on a guide who has been to the peak and knows the best way there. That will guarantee that no matter how high you decide to climb, you are doing it in the most efficient, effective way. That best way is deliberate practice.”

Peak: Secrets from the New Science of Expertise, ANDERS ERICSSON

This sums up the value that an advisor can provide to a smart investor who wants to be successful in retirement. If you are looking for a professional partner to help you plan the next phase of your life, I’d love to chat. Contact me at [email protected].