One of the biggest financial mistakes made by people is to completely misunderstand the time lines for their portfolio.
Client’s often tell me something along the lines of, “I am retiring in 5 years, at age 65, I only have a 5-year time horizon. I can’t afford to lose anything, so I want my portfolio to be very conservative”.
I usually respond something to the effect of, “I guess that means you either plan on not being around after 65 or spending all of your money during your 65th year.” This usually draws a blank look in response.
We must be careful when planning our portfolio, to help ensure it is structured to provide the return required to deliver enough inflation protected income for as long as we live.
If your portfolio requires a 5% average annual return in order to provide a lifetime of retirement income and you become so conservative that your portfolio earns only 3% on average, you could easily run out of money before you run out of life. That is a real risk that many don’t consider.
Thanks for reading,