“To Make Money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish. It is just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense”. - Warren Buffett

Recently at Fiat Wealth Management, we took time to read the book “The Psychology of Money”. If you haven’t read it yet, I would highly recommend it! Warren Buffet’s quote above is just one example of great material within the book. So, why do people so often risk something that is important to them, for something that is unimportant to them? Personally, I think one of the most challenging things someone can face during retirement is making the transition from working and saving to spending money.

Retirement Transitions

A key component to making that smooth transition is being able to be honest with yourself in determining exactly what is important to you and what is unimportant to you.

For example, let’s say you grew up in a family where money wasn’t exactly growing on trees. Let’s assume that you started working in your early 20’s and started to diligently save into your 401K’s and IRAs on an annual basis. Now, let’s fast forward to 2022 and the time has come to retire.

What if you now are sitting on a pile of money that is $2M. An extremely important decision you will have make is… simply, is that enough? Is it really important for me and my family to turn that pile of money into $3M, $4M or $5M? For some, the answer might be yes. However, for most I would argue that what’s really important is making sure that you can take the $2M and turn it into a reliable income stream that will allow you to spend your retirement years as worry free as possible.

“Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”

Creating a retirement plan that will span anywhere from 20 to 40 years is challenging. It is important to be realistic and understand that “Plan A” will almost certainly need to be updated as the unexpected will surely occur. So what can be done to at least try to create a plan that will weather most storms that retirement will bring? The answer lies in finding a way to increase your Margin of Safety.

Am I Ready?

To begin with, I would argue most people tend to have an unrealistic expectation of future stock market performance. However, you really can’t blame people for holding those views when you step back and look at what has occurred over the past 10 years. Since 2012, the stock market has returned an incredible 326% (a roughly 15% yearly average return). The problem with a historically long bull market is that it creates an expectation for future performance.

That brings us to an important question - do you think the next 10 years will look like the last 10 years? I don’t know the answer to that question and, quite frankly, if someone said they do know - I would recommend running in the other direction. The truth is, nobody knows the answer to that question. This is why creating a retirement plan that increases your Margin of Safety is important.

How Can You Increase Your Margin of Safety in Retirement?

In retirement, there are several risks that can derail a plan. Among the most commonly discussed are; market risk, longevity risk, healthcare expenses and taxes. For most people, it’s very hard to make the transition from saver to spender when you feel like you lack control. The truth is, no one knows exactly what will happen with those most common risks. However, you can be realistic and choose to build a plan that can increase your margin of safety which effectively tilts the odds of success in your favor.

A few practical examples follow;

Market risk is something that needs to be considered, especially since the previous 12 years (in my opinion) has led to irrational exuberance. Assumptions have to be made in building a retirement plan. One of the most important is an assumed rate of return on the assets. To be conservative, you could build your projections based on a 4% rate of return instead of the typical 6-7% rate of returns that people tend to expect in the markets. If you can make the plan work on 4%, then you are effectively increasing your margin of safety.

You can also build a plan to increase your margin of safety as it relates to taxes. The majority of people retiring today have most of their retirement savings in a bucket in which they have not yet paid taxes on (IRAs, 401Ks, TSPs, 403b). The problem with these accounts is that you are a joint-owner with the IRS. How much a retiree will keep will depend on how much you pull out of the account, when you pull it out of the account and whatever Congress dictates tax rates will be at that time. If you are of the belief that taxes will be higher in the future you might want to consider this concept of increasing your margin of safety. An effective way to increase control is to start paying taxes today in the form of Roth Conversions. If taxes do increase in the future, you will have increased your chances of success by taking advantage of lower taxes and keeping more of your money.

I hope this information taught you a little about some of the different effects that money can have on you, your thought process and your financial plan! If you are looking for guidance, contact us today!

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Fiat Wealth Management, LLC is registered as an investment adviser with the SEC and only conducts business in states where it is properly notice filed or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.

Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of any topics discussed. All expressions of opinion reflect the judgment of the authors on the date of the post and are subject to change. All investments and investment strategies have the potential for profit or loss.

Content should not be viewed as an offer to buy or sell any of the securities mentioned or as personalized financial advice. Legal and tax advice is general in nature. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Fiat Wealth Management, LLC is not engaged in the practice of law.

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