3 Reasons You May Be Focusing on the Wrong Retirement Goal

The pursuit of higher returns may not pay off in retirement

Man looking stressed.
The pursuit of the wrong retirement goal can put your income at risk. Caiaimage/Chris Ryan

Everyone wants higher investment returns. After all, higher returns means more income in retirement, right? Doesn’t it make sense to find investments with higher returns and use those?

At first glance this seems to make sense. Here are three reasons why focusing on returns is the wrong goal as you near retirement.

Focusing on Returns Masks the Exposure to Risk

Every successful investment scam focuses your attention on the investment returns you will get.

When you focus solely on the returns it is easy to forget to ask questions about market risks and what conditions might occur that would cause losses.

Think about the investors who put all their money with Bernie Madoff, perpetrator of the largest scam in U.S. history. They were so focused on returns that they did not question a few basics; such as the fact that Madoff’s firm did not use a third-party custodian, and thus he could make up what appeared on client statements.

Focusing on returns can get you in trouble with reputable investments too. For example stocks that pay a very high dividend yield are often stocks that are in financial trouble. If they recover, you may make a great return, but it is just as likely the company could fail. Exercise caution when investing in high yield investments, and remember, a good return on investment is the return of your investment.

Getting Higher Returns is Not Even Close to a Sure Thing

It still amazes me that so many people thing a stock broker or investment advisor has some stock-picking prowess, market knowledge, or timing insight that the rest of the world doesn’t have. Think about it; if you truly had superior skill to time the market or pick stocks, you would trade your own account on a full time basis.

You would not subject yourself the regulatory scrutiny and accountability that comes with managing other people’s money.

Investing occurs in one of two ways; either you are buying publicly traded securities such as stocks, bonds, mutual funds and options, or you are investing in private companies. When using publicly traded securities, millions of other highly educated and often sophisticated investors are evaluating the same information you are evaluating to make a buy or sell decision. No one has a working crystal ball. At any given point in time hundreds of forecasts exist. One will prove to be right – but you won’t know which one until after the fact. Investing based on someone’s forecast or prediction is not investing – it is guessing.

When evaluating investments in private companies, you need to have the skills to evaluate the company’s business plan in light of market conditions in that industry. Even if everything looks good, the company might not be successful. That is a risk you must accept.

Competition abounds. A realistic objective is to capture market returns that allow you to reach your financial goals.

Volatility Affects Your Return in Retirement

Invest in a low risk savings account and, naturally, you receive low returns.

Invest in something with risk, and you expect over time that you will be compensated for this risk by earning higher returns.

Investment risk is traditionally measured by volatility – the short term ups and downs your investment values will experience. The down turns will have no effect on you unless you sell your investments while they are down. If you can look at it this way, then while saving for retirement you will be comfortable with more aggressive investments that have the potential to deliver higher returns. But once, retired, this can change.

Once retired, you have to withdraw money to live on.

After all, that is why you saved it! If your investments are down in value at a point in time where you need to take a withdrawal, this can have an adverse effect; this is something us retirement geeks refer to as sequence risk. A bad sequence of returns over a period of time where you have to withdraw funds will lower your overall internal rate of return. Because of the withdrawals, you didn’t have as much capital left to recover when the investment recovered, and so your rate of return will be lower than someone who was able to remain fully invested without taking withdrawals.