After the past year and a half of wild swings in financial markets brought on by the COVID-19
pandemic and then ensuing economic recovery, one wouldn’t be blamed for feeling uncertainty
about whether they have the right retirement strategy to weather any other curveballs the
market may throw.
Creating a plan for financial security can be confusing with so many
conflicting ideas and strategies. Establishing foundational financial literacy and a core
investment philosophy can be key to blocking out a lot of the distractions and focusing on a few
of the fundamentals that will help make a sustainable plan.
Ty J. Young, CEO of Ty J. Young Wealth Management, one of the country’s leading firms for
wealth management, often encounters new clients asking these same questions.
With so many shiny objects and fads (meme stocks, anyone?) threatening to cloud the judgment of new and
seasoned investors alike, it seemed like a good time to remember the core elements of a
retirement plan that can bring peace of mind even when the economy is uncertain.
Below, Ty shares some of the most important principles for investors to be mindful of.
What is the biggest strategic mistake that people make in their retirement planning?
Ty J. Young: More than anything we need to recognize that there are three main elements to a winning financial strategy. We call it a three-legged stool:
- Leg 1: INCOME – you have to be able to take income now or at some point in the future. It must be capable of producing income for you.
- Leg 2: GROWTH – growth to support the income. You’re living off the interest and not the principle
- Leg 3: PROTECTION- this is the one that almost everybody misses. The nest egg must be protected. You have to protect your money against Black Swan events. For example the COVID corrections, the market corrections, the real estate bubbles bursting. We don’t want them to happen, in fact we hope the market goes up everyday but sometimes it crashes and we have to think about that. We’re at a historic high in the market – many people forget the crashes can even happen so they neglect themselves.
You must have all three legs to have a winning strategy.
What’s the most reliable formula for determining whether you have enough assets to retire?
TJY: It depends on your age but basically speaking in today’s dollars, what you do is figure out how much money you’re going to need on a monthly basis when you retire?
- What are your expenses going to be?
- Are you going to have your house paid off?
- Are you going to be traveling?
- What are your expenses going to be on a monthly and yearly bases
You add that number up for an entire year, and then you divide it by the amount of assets you have.
If that number comes out as 5% or less – you’re in pretty good shape. Keep up the good work.
If that number comes in over 5%, you need to get aggressive about saving and investing more money. Figure out how to get more return without adding unreasonable risk.
What are the fundamental habits that everyone needs to begin as early as possible?
TJY: Start saving – That’s a great start; however, saving can sometimes not be enough. Right now if you put money in a savings account you’re making half of 1%. That’s just not enough.
Start Investing – Invest the money you’ve been saving to maximize your returns.
Maximize 401K’s – If you have a 401K and if you invest in that and get a match as well, that’s additional money added to your account along with compound interest plus tax-smart growth.
The habits are saving and then investing that money. Investing that money as efficiently with the highest rate of return as possible with the minimum amount of risk possible while getting matches and being tax efficient.
What is your advice for having peace of mind over your strategy when there is volatility in the markets?
TJY: My advice is understand there’s going to be volatility in the market. There’s going to be crashes in the market like we had in 2008, 1929 and when the pandemic hit. Those things are going to happen. There’s going to be Black Swan events. Be prepared for that, just like when you put your seatbelt on. You put the seatbelt on because crashes happen from time-to-time. You can’t put on your seatbelt once the crash begins. It’s too late.
The same thing applies with our investments and retirement plan. To have a winning retirement strategy, safeguards must be in place. We have to have our portfolio balanced in assets and in financial products where we can earn a reasonable rate of return but are also protected against that Black Swan events that we hope never comes. That is how you sleep at night when the markets get volatile. You deal with it before it happens.
Do you recommend any safeguards to have in place during down cycles in the economy?
TJY: Yes, absolutely yes, and during upcycles as well. The reason for that is we don’t know when the next downcycle is going to happen. We’re at historic highs in the stock market. It could correct, or even crash, tomorrow – I hope it doesn’t but we have to be prepared. So having safeguards in place in case the market goes down is absolutely paramount. There are different ways to minimize risk while maximizing your return and trying to keep fees low. It’s a vital part of a winning retirement strategy.