You listen to any personal finance podcasts or YouTube videos, sooner or later you hear someone talk about the importance of starting to invest when you are young and the power of compound interest. And they are not wrong.
But if you are in the later years of life, the advice is useless to you. Compound interest works as advertised. The only problem is it requires decades to show its magical power and if you are past sixty, you simply do not have decades to wait. Telling you to start young is pointing at a lever you no longer have. Advice aimed at someone that has decades to wait is not advice for you. And hearing it stings a little.
The sting reminds you of something you cannot do anything about. Most of the finance industry is in the business of getting your paycheck invested back in the economy, in the stock market, corporate bonds and similar financial products. Few have interest in discussing what happens when the paycheck stops.
And it is not just me saying it. The advisory council at the Department of Labor studying retirement accounts found that the standard advice holds up better in the saving years than in the spending years. Same advice. Start early. Put more in. Let it grow. Very little is said for when that road is behind you.
For some of you near retirement or a few years into retirement, you do the math between what you have and what you think you need and see there is a gap to fill. If the gap is too wide, you are tempted to find a solution to make your savings grow faster. And that is not because you are greedy. It is panic setting in, feeling you have not saved enough and invested enough when you had time.
The SEC has a page on their website, warning investment professionals about tempting older investors to take on more risk to squeeze out more income from their retirement savings. Warren Buffett said it perfectly about some smart investment professionals, during a 1998 talk at the University of Florida: "To make money they didn't have and didn't need, they risked what they did have and did need."
Most of you reading this article have not been careless with your retirement. But you might have heard the little voice in your head, saying you could do better if you were braver. And you should take the voice seriously because it is giving you the wrong fix for your retirement saving problem.
William Durant, who founded General Motors, once propped up GM's stock price with borrowed money. He was admired as a shrewd investor, newspapers called him the leading bull of Wall Street. He sold most of his stock in the spring of 1929 before the crash and then after the crash he decided the worst was over, and reinvested his fortune, trying to time the market. His gamble did not pay off. By 1936, he was bankrupt, and his filing listed $250 in assets, the clothes he owned, against debts he could not pay. Durant ended up running a bowling alley in Flint, MI, down the road from one of GM's factories in his late seventies.
Durant was a smart and well connected investor. His demise was not because he lacked brains or information. Applying the wrong fix to achieve outsized returns destroyed it all.
So what do you do if your retirement savings are less than what you need, if taking more risk in the market is not the fix? The good news is you are not out of options. There are three levers you can use: when to claim Social Security, how long you keep working, and how you spend in retirement.
If your retirement plan heavily relies on Social Security, when you decide to claim it has a big impact on your plan. Every year you wait to claim Social Security between 62 and 70, your check grows. If your Social Security check is $1,400 at 62, assuming 3% cost of living adjustment, your check grows to $3,142 if you delay your claim until you are 70. The check you claimed at 62 would have grown with those same adjustments too, but only to about $1,773. And your check will grow with inflation, and does not rely on stock market performance.
The second lever is your retirement age. If your saving is less than what you think you need, working a little longer can have a big impact in helping you achieve your retirement goals. Economists did the math, and for a worker in their mid-sixties, working an extra year raises retirement income by about 8%, for life, much of it arriving through the bigger Social Security check you claim later. Even delaying retirement by three to six months could have the same impact as saving an extra percentage point of your salary for 30 years! And if you are trying to catch up in your retirement savings in later life, working a little longer is a much better strategy than trying to take on more risk.
Working longer is not available to everyone, and pretending otherwise would be dishonest. Health ends careers, and sometimes the option of working a little longer is simply not available when your employer decides you are no longer needed, discarding you when you are most vulnerable. But if you can hold on to even a few months longer, it can have a big impact on your retirement plan.
The third lever is your spending plan. Dividing your spending into essentials, experiences, and other nice to have discretionary spending can help you manage the money you have during good times and bad. In a well diversified portfolio that provides both income through dividends and bonds and capital appreciation, a dynamic spending plan is the key in avoiding selling principal investments during market downturns, especially early in retirement where the impact will compound. During those years, it is much more prudent to cut discretionary expenses, and rely on the income portion of the portfolio plus Social Security if available. You should not time the market, but you can time your nonessential spending plan. The point is not to shrink your life, but to manage your spending dynamically.
None of these levers rely on timing the market or taking more risk to "catch up."
So next time you are looking at your retirement plan and a little voice is telling you to be brave and take more risk and close the gap, remember it is aiming at the wrong lever.
For you, it is the date you claim Social Security, the year you stop working, and how you plan your spending.
You cannot change when you started, but that does not mean the important decisions are behind you.
Sources
The Department of Labor's ERISA Advisory Council report on the spend down of defined contribution assets, which finds generic guidance more workable in the saving years than in the spend-down years: https://www.dol.gov/node/67035
SEC and FINRA report from the National Senior Investor Initiative, warning that broker-dealers may recommend riskier, possibly unsuitable securities to senior investors seeking higher returns: https://www.sec.gov/newsroom/press-releases/2015-67
Warren Buffett's October 1998 question-and-answer session at the University of Florida School of Business, the source of the quote about Long-Term Capital Management: https://novelinvestor.com/buffetts-lessons-long-term-capital-management/
American Heritage, "The General of General Motors," the record of William C. Durant's rise, his 1929 re-entry, his 1936 bankruptcy, and the Flint bowling alley: https://www.americanheritage.com/general-general-motors and, for the alley's location near the Buick complex, GM Factory One's Durant biography: https://www.gmfactoryone.com/dld/content/product/public/us/en/factory-one/history/_jcr_content/par/row2/par2/sectioncontainer/par/download_1683002846/file.res/17F1_OnePager_Bio_Durant.pdf
Social Security Administration, effect of early or delayed retirement: for workers born in 1960 or later, benefits claimed at 62 are 70 percent of the full-retirement amount, and 124 percent at 70: https://www.ssa.gov/oact/ProgData/ar_drc.html
Bronshtein, Scott, Shoven, and Slavov, "The Power of Working Longer," National Bureau of Economic Research Working Paper 24226: one more year of work raises retirement income by about 7.75 percent, and delaying retirement 3 to 6 months equals saving an extra percentage point of earnings for 30 years: https://www.nber.org/papers/w24226
