My first airplane ride was in 1988. I remember the anxiety, but it was thrilling! My new bride and I went through security and boarding, got on the plane, popped the Dramamine, and held hands during takeoff. The crew efficiently served beverages, and 40 minutes later, we were back on the ground.
The plane ride was a seamless experience for Barb and me – the same plane, pilot, and crew – just a new location upon landing. However, the flight crew experienced the flight in three very different stages. They helped us board the plane and place our luggage before takeoff. They served us a snack at 30,000 feet, and finally, they reminded us to buckle up for landing.
Similarly, average investors often perceive a similar “seamless” experience regarding retirement planning. Just as the location was the only change I perceived on my plane ride, the only difference an investor may note is their account balance. When the statement arrives, their eyes drift to the bottom to see how much they have accumulated. They tend to get caught on auto-pilot without noting the three different investment stages that need to be managed during their journey toward retirement.
Phase 1 is Accumulation, where investors save money. Just as a flight crew considers weight distribution during loading, the same is true for investors' accumulation strategies. During Accumulation, investors' primary goal is to save the correct percentage of income and build tax diversification. The investor's nest egg shouldn't all be directed to a 401k plan. The goal is to include tax-deferred, tax-free, and taxable accounts. Investment returns are great, but retirement success comes from tax diversification.
Phase 2 is Preservation. Although saving (Accumulation) may still be occurring, the amount being invested becomes secondary to preserving the nest egg. Preservation is the only phase where the average investment return truly matters. Investors need to exercise discipline when dealing with seasons of volatility and resolve to stick with their decisions.
Phase 3 is Distribution. In airplane terms, investors are trying to achieve a safe landing. This phase requires relentless attention to volatility, and investors must be aware of the tax treatment on every dollar needed. If an advisor mentions “average investment return” during the distribution phase, investors should end the conversation and walk out because the advisor clearly does not understand math. Taxation and volatility are paramount in landing the investment plan safely.
We like to think about average returns as investors, but markets don't move in straight lines. When distribution occurs, the withdrawn funds are never replaced in the account. The term “average return” doesn't consider that fact, and as a result, the investor's experience could be much better or much worse than the average return. This reality becomes easy to understand when people invest during stock market pullbacks, but it is often forgotten during the withdrawal phase.
There is an art to safely landing a plane, just as there is an art to distribution planning.
The Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.