Chapter One

1. The Right Mindset for the Big Transition

Recently, we met with a prospective client who seemed, on the surface, to be well-prepared for retirement. He was in his early sixties and had responsibly saved his income throughout his working years; by the time he started planning his retirement transition, he had well over a million dollars in his 401(k), a small pension and social security.

When we began working with him during that first meeting, though, we discovered that the majority of his savings was in cash, CDs, and bonds. As we’ll explain in great detail later in this book, this type of very conservative allocation can represent an unnecessary challenge to the investor who needs to create a growing stream of income for upwards of thirty years!

This client had had the best of intentions, but he simply was operating with an outdated perspective. He’d followed the popular wisdom passed on to him by his parents and put his money in “safe” places, avoiding the volatility of the financial markets. In reality, he had unknowingly set up himself and his family for an income that will become increasingly difficult, if not impossible, to keep up with inflation.

“Have you given any thought to investing a portion of your money to stocks?” we asked him.

“Oh, no, I couldn’t do that,” he told us. “What if the market crashes? I’ll lose everything.”

This client was petrified of the mere notion of investing in the stock market. He was immensely distrustful of what he saw as a volatile and rigged system, and without any real education in how to handle his investment portfolio, he’d unwittingly made himself and his family vulnerable to two of the long-term risks a retiree faces: inflation risk and longevity risk, which we will discuss in depth later on.

Moreover, this client isn’t the first we’ve seen with this confused and fearful mindset—not by a long shot. If anything, his mindset is shared by many people nearing retirement.

Where Did This Mindset Come From?

By and large, people operate in a fear-based mindset when it comes to their money, and especially when it comes to their retirement income. Some people might not be afraid, necessarily, just confused, because they lack basic financial literacy; but that confusion still leads them to make the same bad decisions as their more fearful cohort. For instance, they’ll invest their money in less risky assets in order to be “safe” or, arguably worse, they’ll pull their money out of the right places prematurely because they’re worried it’ll be lost.

Why does this fear-based mindset seem to be the norm among many of the baby boomer-aged retirees? There are multiple historical and social factors that have converged to create a common atmosphere of confusion and trepidation. Understanding the root causes of this mindset is crucial to take steps toward changing it.

Depression-era Parents

It’s true for almost everyone: much of what people know about money, they learned from their parents.

The current generation of retirees and soon-to-be retirees had parents who were raised during the aftermath of the Great Depression. This experience made an immense formative impact on them and created a scarcity mindset. To a Depression-era person, the worst possible thing that could happen to someone was losing all their money.

Those who lived through the Great Depression’s aftermath also largely shared a common misconception about the cause of the event; most people were convinced that the Depression was the result of the stock market crash of 1929. In reality, the crash of 1929 was just one factor among several, and not at all the root or even primary cause of the economic situation the country found itself in.

The parents of the baby boomer generation had the best of intentions, but were, for the most part, operating from a skewed guidebook when they passed on their financial knowledge to their children. As a result, some of them inadvertently raised adults who are distrustful of the stock market and so worried about losing all their money that they neglect to invest it in the ways that would serve them best.

Little Financial Education

As we discussed in the introduction, the United States education system suffers from a glaring lack of attention to personal finance. It’s exceedingly rare for high schools, let alone university-level institutions, to offer students courses on personal finance; most would-be adults walk the stage at their college graduation without any idea how to manage their money, and certainly very little sense of the fundamentals of portfolio management, let alone how to create an income from a portfolio of stocks, bonds, and cash.

With such a paucity of information on such a critical subject, most adults simply follow conventional wisdom throughout their working years. They follow the prescription laid out by their parents, general rules of thumb, and the financial-media celebrities. This, as we’ll explain next, is not a formula that sets anyone up for financial success.

Media Misinformation

The financial media, including many cable news and print publications, do the public an enormous disservice in their focus on short-term financial projections. Worse, fear-based reporting is amplified in the existing worried mindset of retirement-aged people, and as a result, they’re more likely to latch on to reactionary advice that is likely irrelevant to their particular financial situation.

Financial news organizations inadvertently express to their audience that the two most important aspects of investing to focus on are timing and selection.

Timing is exactly what it sounds like: when it’s good to get into the market, and when it’s good to get out; or, less obviously, when one should over-weight or under-weight a particular type of investment. Put simply, timing refers to when a consumer investor should buy or sell investments. Selection is also what it sounds like—should I pick Google over Amazon? Is Microsoft a better pick than Apple? For day traders, people whose job it is to make as much short-term profit as possible for clients, timing and selection are certainly of primary concern. But the vast majority of the financial media’s audience does not consist of day traders, and in fact is made up of people looking to maximize their long-term financial resources to fund real-life long-term goals. Although these kinds of discussions can sell air time and magazines and drive commissions, they have very little impact on investor results long-term.

We often talk with prospective clients who recount to us how fearful they felt during the financial crisis of 2008, and how they made decisions in hindsight that cost them a lot of money. If we can agree that the financial media concentrates too much on timing and selection, we can also make the case for the general media skewing the news toward an “end of the world” mentality. They are forever crying foul and focusing on what’s going wrong versus what’s going right. Think back to 2008, particularly after the collapse of Lehman Brothers; what we heard from the media was, “The world as we know it is going to end! The sky is falling!”

At what point in history have we sustained a real crisis that does not eventually work itself out? Human nature is programmed to more easily believe bad news, and be skeptical of good news—hence the famous saying, “Human nature is a failed investor.” But how does this media hype help anyone make the best decisions that are consistent with their real-life, long-term goals?

Industry Challenge

It’s incumbent upon us to bring up an important subject: in the decade since the financial crisis of 2008, we have had time to look back and assess what transpired and what has changed. Lasting damage occurred on many fronts, not least of which was a serious erosion of trust in the financial services industry—and deservedly so. Our industry as a whole continues to fall short of delivering on what consumers really need and want: financial service professionals who can consistently offer value to clients by demonstrating professionalism and providing solutions, not simply pushing products. And for those investors in or on the verge of retirement, having a choice of professionals who focus on retirement income planning and who will address their individual needs becomes vitally important; most importantly, those professionals should provide unbiased advice that cuts through the noise, thereby helping their clients mitigate unforced errors and emotional decision-making.

A primary reason why we wrote this book is precisely to address...