When people find out I’m an investment advisor, they usually launch into a personal anecdote about how they made a killing on a hot technology stock back in the day, or they vaguely gloss over the current state of their portfolio. Then they lean closer and ask, under their breath, “Will I be able to retire at age a certain age?”
By now I’ve learned to predict their disappointment when I provide my answer with a deadpan face. For it seems that while most retirement savers are aware of the many variables that will affect their finances in retirement (withdrawal rates, asset allocation, Social Security benefits, etc.), it’s as if nearly all of us make a conscious decision to ignore the No. 1 fact that dictates a person’s ability to live a comfortable retired life: the size of their retirement fund.
That’s right, it turns out that, after all, size matters — a lot. This point may not be obvious amid the haze of 24/7 financial advice, prognosticating, columns, blogs and financial punditry. But the fact remains that the most significant predictor of how well off a person will be in retirement is the size and value of their nest egg the day before they retire. Yes, it really is that simple.
There is no omniscient investment manager delivering Warren Buffett-like investment returns, no asset allocation so finely tweaked, no tax-sheltered account offering infinite deferment that can compensate for a small retirement account.
So how can aspiring retirees reach their goal? Surely during the “accumulation phase” the expertise of an investment manager, the excellent guidance of a financial advisor and the power of compounding come into play. While these are all important factors, they are not the most important factor. Thankfully, the most important factor that will make Morty and Helen Seinfeld and their fellow retirees at the Del Boca Vista retirement community envious happens to be the one factor we all can control — how much we save during our working years.
The problem, of course, is that no one, including many of my clients, wants to hear this answer. This answer isn’t complex. This answer isn’t sexy. It doesn’t involve computer-generated Monte Carlo simulations, stochastic calculus or time-weighted internal rate of return cash flow analyses.
It implies that there is no “secret” to the market’s movements, no club full of initiated members who have cracked the investment code. Perhaps it even suggests that all the time this writer and other financial professionals have spent studying the market has only been marginally useful.
The average consumer would do well to remember Occam’s Razor, which says that the simplest explanation with the fewest assumptions is often the correct one. So in terms of what you can do to increase your future happiness during retirement, remember that we can control how much we set aside for retirement, year after year.
Now go out there and save.