Personal Wealth Management / Expert Commentary

Fisher Investments Founder, Ken Fisher, Reviews the Most Common Mistakes in Retirement Planning

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer, Ken Fisher, shares common mistakes people make in retirement. According to Ken, one mistake people make is underestimating their time horizon. Ken says people are living longer than before and investors need to plan accordingly to avoid running out money. Another common mistake he discusses is when retirees are too conservative with their investments—often preferring less volatility—which can sacrifice the type of growth needed to reach their retirement goals.

Ken also believes people often forgo basic financial planning—something he sees as necessary for investors to better understand the returns they need to achieve their goals. Finally, Ken says people trust “their gut” too much, which can lead to concentration risks. He discusses how even the best investors are frequently wrong, so he recommends a well-diversified portfolio focused on the long-term.

Transcript

Ken Fisher:

I'm almost never asked, "What kind of mistakes do people make in retirement?" I think most people don't think about that much as they plan for retirement. I think they presume that it's orderly and it'll happen naturally, and they shouldn't worry about too much. And I'm not suggesting worrying. I'm suggesting that there are some really vanilla things that people do that are errors as they plan for retirement.

One of them, is to plan for too short a time horizon. The reality of our trends toward aging and longevity, in fact, are that overall people don't seem to be living longer. But that's misleading because we have an inordinate amount of misbehavior-oriented, youthful death bringing down the averages. But when people get to retirement age, they've gotten past all of that. And those people—old codgers like me—tend to live longer than people ever have, and people don't plan for a long enough period, usually. They often presume they'll live about as long as the actuarial tables say they will, but they'll probably live a good notch longer. And the best way to think about that, in my opinion, is to ask yourself, how long do your parents live? How long do your grandparents live? What's your health compared to them? And add a few more years on to that because it's great to die with some wealth. It's not great to run out of your wealth before you die and suffer aged poverty.

Then the other part of that is most people aren't as assertive in their retirement planning with their assets as they should be in that they tend to be too conservative. They tend to overemphasize not losing money versus diversifying and suffering some short to intermediate term volatility to get to higher longer-term returns. The fact is too many people have been bred to think that they need to be very conservative once they hit retirement, and by that they mean own non-volatile low-return assets like bonds or cash, savings accounts, etc. And in so doing, they miss the point that a round of inflation like we've just had eats into that heavily. Bond prices fall as long-term interest rates go up and they tend to again fail to recognize the inflation impact over the very long horizon. I mentioned earlier that most people have longer than they think they have and they need to aim more at higher returns, suffering some volatility.

The third mistake is overly wanting to be comfortable. I've made this mistake in advertisements that my firm has run where we've said, "Do you want a comfortable retirement?" Comfort is a dual edged sword. It's comfortable to have enough money. It's not so comfortable to suffer volatility, and yet volatility is necessary to get those higher returns I was mentioning just a moment ago. So when you think about that, you say to yourself, "Jeesh if I want to be comfortable, my portfolio orientation that makes me most comfortable is that low volatility, because I don't think about it much and it doesn't scare me from time to time and I don't have to worry about all the nonsense that pops up in the media where if it bleeds, it leads. And so then I can be more comfortable." But if you do that, then you're back to those lower returns again.

The final thing is to not actually go through, and not necessarily in a terribly detailed, complicated way, but in a fairly basic way that you could probably do on a Saturday with a calculator and a pen and a piece of paper—do some basic financial planning. Plug in some numbers. Do some forecasting. What do you think the returns will be? What do you think your expenses will be? What do you think inflation will be? Add on a notch to that. Add on a further notch to what your expenses will be, and then see what kind of returns you really need to achieve that over the time horizon that you're likely to need the money to take care of you for. These are the very most basic mistakes that I see people make.

And then, of course, one final one— is to go with your gut. And in going with your gut what I mean is load up on things heavily that seem to you to make sense for what will do well in your portfolio and retirement investment assets. And in doing that—because people are wrong a lot— the very best in the realm of endeavor that I operate in aren't right more than about 70% of the time. In the long-term, 70% of the time is really good and has really good returns if you can do that. But that means you're wrong 30% of the time. And that 30% might be when you load up on that thing you think is really good. Blows up on you and then you suffer real losses. So the argument there is you do need a fair amount of reasonable diversification, but reasonable diversification aimed at those returns that you need in the time frame that you really have without being too conservative and having your portfolio be comfortable for you, but instead having the amount of money that you can spend on an ongoing basis be comfortable for you. Thank you for listening to me and I hope this was useful for you.

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