Secrets to a Happy Retirement: Investment Strategies

Here are key investment strategies to safeguard your financial future and maintain a joyful retirement.

We each have our own definition of what happiness should look like in retirement. But what does it take to get us from our idea of a happy retirement to an investment strategy that actually produces the happy retirement in terms of dollars and cents?

My life’s work involves building and managing investment strategies that help people achieve their happy retirement in dollars and cents.

I think the most important thing to understand about retirement is that the best investment strategy for you before retirement (often called the accumulation phase) will almost certainly be entirely different from the best investment strategy for you in the immediate years leading up to your retirement and in your retirement (the decumulation phase).

When you invest during your working years for retirement, your objective is to accumulate assets and compound your capital. During this time, metrics like your long-term average annual net of taxes return or your risk-adjusted net of taxes return can be a good guide to how well you are doing.

Investing is always complex, but the economics of accumulating assets during your early working years are conceptually and mathematically vastly simpler than the economics of investing during retirement. Many people can do reasonably well accumulating retirement savings and avoiding the biggest mistakes if they are thoughtful about understanding their tolerance for losses, stay focused on the long-term and select efficient, diversified investments.

Accumulating assets during your working years is still not simple, but it’s as easy as investing gets because you have time on your side. For example, if you are not a prudent investor in your thirties, you still have decades to recover from it. If you make a mistake in your 60s or 70s, it’s a much bigger problem and one that can wreck a happy retirement.

Here are four salient considerations to know about the dollars and cents of retirement investing.

1. Retirement is usually a long period between twenty and thirty years. With increasing longevity, it can even be as much as forty years. (I can think of a half dozen people in my own extended group of family and friends who are in their mid-90s and still living healthy, vibrant, engaged lives.)

2. Over most or all of our retirement years, our expenses will be much greater than our earned income, the income we get from doing work every month. We may still bring in some earned income over retirement, but it is retirement after all! Most of us will be spending more time enjoying the fruits of our past labor than we will be laboring for the future. So, the need for investment income beyond what Social Security covers is a demanding, relentless must.

3. We are going to have to write a check to ourselves every month for twenty to forty years with near certainty. Skipping the check writing won’t be an option.

4. Inflation. That monthly check will need to grow with inflation, every year for decades.

In sum, these four aspects of retirement — writing an inflation-indexed check to ourselves from our investments every month over many years with the certainty of no interruptions — are what makes retirement investing so challenging and why it requires a different mindset and a different investment strategy.

During our prime working years, we can have a “risk-adjusted returns” mindset because that aligns with the accumulation objective of those years. Beginning around five to ten years before we retire and during retirement, we need to adopt a very different investment mindset with different priorities and investment strategies. The happy retirement investment mindset is more akin to asking the question: “How well am I managing the risk of capital losses and balancing that risk with the return on my capital such that I can write an ever larger check to myself (to account for inflation) every month for the rest of my retirement years, with as close to certainty as possible given the number of years left?” I call this the “long-term income with certainty” mindset.

The price of investing for returns when you should be investing for long-term income with certainty can be devastatingly large. Consider the following:

2022 marks the most recent significant market pullback. In 2022, a passive 60/40 portfolio (composed of 60% equity / 40% bond) was down a little more than 16%. That same year the average US retail investor (someone managing their own money) lost about 35% of their capital. This occurred during a period of time when annual inflation was about 8%. That means, for these investors, their capital loss in real terms was between minus 24% and minus 43% in a single year.

For most retirees and those about to enter retirement, losing between a quarter and nearly half of their real assets is simply not acceptable or manageable from the happy retirement perspective. At best, such a retiree would not be able to increase their monthly draw to keep up with inflation without impairing their future income. More likely, they would have had to significantly cut back on their monthly income and expenses, foregoing, for an uncertain period of time, the happy retirement they thought they had saved all their life for. Many have had to do just this in fact these past few years (and in the decade that followed the Great Financial Crisis that began in 2008; more on that below).

Since inflation reared its ugly head post-pandemic, consumer prices are up over 20%. Very roughly, an investor who lost 16% percent of their capital would now need a 60% return on their investments just to keep their monthly check even after inflation. An investor who lost 35% of the capital would need a nearly 100% return on their capital to keep up. Both investors will have to be more cognizant of managing the risk of loss moving forward, making the challenge of “getting back to even” even more challenging. The cost of failing to adjust your mindset (and corresponding investment strategy) from a “simple risk-adjusted return” mindset to a “long-term income with certainty” mindset can be brutal.

It may be tempting to think ‘global pandemics don’t happen very frequently, so why worry about the next economic shock.’ However, economic shocks that matter to long-term income investors with limited investment horizons abound. In fact, when you examine history, you find that there is about a 30% chance of having a 2008 global financial crisis (GFC) like economic shock every 10 years. For those who don’t remember, it took most investors between 5 and 10 years to recover their GFC losses in nominal terms and in real terms even longer.

It may also be tempting to think that after the next shock, the US federal government will deploy massive fiscal stimulus to safeguard the economy similar to what happened post-pandemic. Most economists would disagree, for several reasons. The first is inflation. Post-pandemic fiscal stimulus produced a disruptive inflationary spiral that no policymaker is eager to repeat. The second is means. US annual and total accumulated federal deficits have risen to an unsustainable level. Interest on the debt in FY2024 is already larger than defense spending. It is also larger than Medicare spending. The fiscal realities of accumulated debt and debt payments will limit the ability of future administrations’ to spend so extravagantly. We are more likely to see more measured and modest fiscal responses to future crises than past crises.

So, given all of this, what steps you can take to give yourself the gift of a happy retirement?

First, understand and accept the realities of your challenge. Make the leap and drop the “simple returns” or “simple risk-adjusted returns” mindset five to ten years before retirement. It won’t serve you well moving forward because it’s not aligned with the economics and mathematics of the rest of the days of your life.

Second, adopt a “long-term income (indexed for inflation) with certainty” investment mindset. This mindset is aligned with the economic and mathematical properties of a happy retirement and will maximize the chances of you achieving it.

Third, and most importantly, turn “long-term income with certainty” into an investing reality by selecting investment strategies and funds that make this the objective. Due diligence is key. This is where the rubber hits the road and the daily battle of getting your capital working for your happy retirement will take place.

At Markin Asset Management, we employ these investment principles in our investment strategies and funds.

About Markin Asset Management

Markin Asset Management is a diversified systematic manager that is active across hedge, total return income, equity and retirement strategies and funds. We seek to deliver outcomes that are aligned with the long-term goals of our investors. Our culture of combining quantitative and fundamental research and keenly focusing on the selection and management of risk exposures to enhance investor outcomes are distinguishing features of our firm. Markin is based in Rye, New York.

This post originally appeared on TheStreet.com.