high value decisions

High Value Decisions When Nearing Retirement

“…The most optimistic psychology is always applied when things are thought to be going well, compounding and exaggerating the positives, and the most depressed psychology is applied when things are going poorly, compounding the negatives. This guarantees that extreme highs and lows will always be the eventual result in cycles, not the exception.” – Howard Marks, Oaktree Capital

We have seen the extreme highs and lows of cycles before. In our investing lifetimes, they defined years like 1982, 1999, and 2009. The long period of “malaise” in the late 1970’s compounded pessimism. The dot-com boom of the 1990’s compounded market euphoria. The compounding that Howard Marks describes above implies that time has passed with optimism or pessimism accumulating along the way.

Our story in 2020 is faster than that, though. Optimism and pessimism are competing for oxygen minute by minute, leaving many people I speak with feeling stuck, indecisive, and paralyzed in their decision making.

The Feeling of Paralysis

“I am not sure about doing anything right now.” That phrase, which we have heard frequently in recent months, has positive implications in the short-term, but can create problems the longer that uncertainty lasts. The upside of decision paralysis is that people are not moving money around based on emotions. Fidelity reported that of plan participants in their 401(k) and 401(b) accounts, less than 10% of retirees changed their investment allocation from February to mid-May. Of those participants, only 31% moved some of their stock funds into non-stock funds.

On the surface, the above appears to be good investor behavior. I expect it is being rewarded as the stock market continues to rally into the Summer. The downside to decision paralysis is that investors sometimes end up with decisions that are emotional, low value, and high value lumped together in the same basket.

Some decisions are based on emotion (going to cash), some offer little return (trading small stock positions), while others are more consequential. I want to spend time on this third category: High Value Decisions. They are the ones that require the most thought, the most planning, and can be the most meaningful at a time like this.

paralyzing decisions

Return on High Value Decisions

We track our return on investments as a measure of our progress toward financial goals. What about our return on high value decisions? In retirement, high value decisions are financial options that are unique to each of us and help preserve our wealth throughout our life. A runaway bull market can make these decisions seem trivial. However, turbulence exposes the truth that, unlike stock performance, these decisions involve things that are under our control in our financial plan. For example, how much more money would we save, earn, and grow if we made better decisions about:

  • Timing Social Security
  • Tax efficiency
  • Generating sustainable income
  • Leaving our heirs the right assets

If you are at or nearing retirement age, think back to the decade of the 2010’s. These were the conditions:

  • A 60/40 stock/bond portfolio returned over 8% per year.
  • You were adding to your 401(k), not drawing it down.
  • Inflation averaged less than 2% per year.
  • Tax rates were declining.
  • Federal estate tax exemptions went from $5 million to over $11 million per person.

With those trends in your favor, a little complacency on high value decisions could be forgiven. The market made up the difference.

Then what do we think of the conditions today? Future returns could be lower. Taxes could be higher. Inflation could move closer to historical norms. All of the above and you are in spending mode. The importance of your high value decisions just increased.

The Social Security decision is a great example because many individuals already have a strategy in mind based on what they read or hear from their friends. But when my advisor team shows them a dynamic model of how many more dollars they would have at different stages of retirement, the decision to delay often becomes clear. That 8% annual increase in Social Security benefit from age 66 to 70 looks pretty attractive in a volatile, 0% interest world.

An Antidote to Speed

If you stayed the course through the first half of this year, your stability has been rewarded. However, you may still feel confused as to what to do next. The good news is that fast moving times do not mean you have to make fast decisions, like frequently changing your investment strategy. On the contrary, a slower thinking, more deliberate focus on the high value decisions is more productive and potentially more profitable when expectations for the future are lower than the past.

Investing in the next ten years will be different from the last decade. That is not a prediction. It is a fact that is true now and has always been true. You may feel paralyzed and unsure today, but you do not need to make every decision at this moment. If you need clarity over your high value decisions or need help sorting through the low-value and emotional decisions, contact me at dmorton@mortonbrownfw.com. Our team is happy to have a conversation with you to help avoid decision paralysis.