How Will My Retirement Be Affected by the Stock Market?

“God, grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference.”

– Reinhold Niebuhr

Maybe you have seen the Serenity Prayer before maybe you have not.  I grew up with it as a refrigerator magnet in our kitchen.  The third line, “wisdom to know the difference”, is the most important.  Specific to retirement planning, understanding what is in your control and what is not will hopefully allow you to have a few more restful nights of sleep.  

There are many variables that will impact the success or failure of your retirement planning.  Generally, they can be divided into three groups:  

1) Things you cannot control

Sadly, it is the things that are outside of our control that seem to dominate our thinking.  

You cannot control the stock market, government policy or the economy.  All you can do is adjust and move on.  If you fixate on these, you will miss the things you can control. Frankly, the things within your control have more influence on the success or failure of your plan.  We know the stock market is bound to go up.  We also know the stock market will eventually go down.  If you have 20 years until retirement, the market going down for a couple weeks will not significantly impact your final result.  However, one of the biggest mistakes people make is reacting to market movements.  I’m sure you have seen or heard that the stock market averages an 8% return per year (or 9%, or 7% the number changes depending on the data range).  What is included in that average is years when the market goes up 30% and years when the market goes down 30%.  It isn’t fun when down is happening, but it is normal.  If the market has been going up they may be hesitant to invest, thinking the market will go back down and buy at a better price.  The funny thing is, when the market does go down, people decide not to invest because they worry it will keep going down.  I say “people” instead of “clients” for the simple reason that advisors fall victim to the same emotions at times.  When it comes to things outside of our control, we can adjust our plan if needed, but we cannot let them distract us from focusing on what we can actually control.

2) Things you can influence  

Influencing is about increasing the chance of good things happening or lessening the chance of bad things happening.  

Healthcare costs are a huge concern to all plans.  We cannot 100% predict if we will get sick and must quit working or become infirmed and need nursing care.  However, if we follow medical advice about eating healthier, getting exercise, watching our weight, etc., then the odds of getting sick drop.  No one can tell if you if the market will go up or down but understanding what you’re invested in and the costs can help generate a steadier return. Back in 2008, when the stock market was down about 37%, an average diversified portfolio was down in the mid 20% range.  While nothing prevented the markets from going down, many savers lessened the severity of the move through diversification.  By influencing, we hope to adjust the impact these events have on our plan while understanding that we cannot eliminate them from happening.

3) Things you can control

Now for the good news! The biggest factors in determining your retirement plan success are within your control.  

The most important factor is your savings rate. Earning an 8% return instead of 6% is obviously better, but if you are only saving $100 with an 8% return instead of saving $1,000 with a 6% return, you will not be better off.  If you want to save more, then spend less. Yes, I know. I said it was in your control, I did not say it would be fun or easy.  A new job that earns more money but leaves less time with your family is a personal choice, but it is within your control.  Deciding when to retire (most of the time) is your choice, as well as when to collect Social Security. While there are pros and cons to any of these decisions, they are generally your decision to make. 

All of this may be easier said than done but focusing on how to save more for retirement is much more important to the result than worrying how a tax proposal (that may change a few times before you retire) will impact your retirement lifestyle.  Spend your energy on what you can control, not what you cannot.

Are you ready to take back control to a successful retirement? Shoot me an email at info@afmgplanning.com or access my calendar here to schedule a phone call when it’s most convenient for you.