A BEGINNER’S TALE: "HOW DOES TIMING AFFECT MY RETIREMENT?"
Carlos M. Sera, MBA
August 13, 2015
We’ve all heard the phrase “timing is everything.” It is especially important when you reach the stage in your life where your portfolio or assets must provide a stream of income for the rest of your life. This means that when you retire matters. If you retire a year earlier or a year later it can make a difference. There are plenty of phrases that speak to the word beginning. John F Kennedy’s phrase “Let us begin” is embedded in my subconscious as is the phrase “Well started is half finished” which I attribute to the Sisters of St. Joseph. So, when you begin and how you begin your retirement matters.
In the last tale, A Tricky Tale, I asked the reader to take a quiz. The quiz is at the end of the tale and immediately precedes this tale. It gives the reader a crystal ball that can see 25 years into the future and asks the retiree that must live off of the income generated from investments to choose between two mutual funds. The first mutual fund turns out to be the best performing mutual fund in the country for the 25 year period from 1969 to 1993. The second one is also a top-performing fund but far from number 1. The quiz is a trick question because the retiree will run out of money if they chose the best performing fund well before they reach the year 1993. They run out of money because the best performing fund made its returns in a very volatile manner. It had periods of spectacular returns as well as periods with substantial losses. In fact the top-performing fund from 1969 to 1993 lost 63.8% of its value during the June 1, 1972 through September 30, 1974 period. The second fund made steady returns and when it had losses they were much more contained.
The purpose of that tale was to illustrate the concept of the mathematics of recovery as well as the concept of volatility. The purpose of this tale is to illustrate the third lesson for retirees. It is the lesson of timing. Said differently, the investments you choose and the day you retire matters. The subtitle of this tale says that timing is almost everything. If you combine timing with the mathematics of recovery and volatility then you have everything for the retiree.
With this as background, let me give you another quiz. From A Tricky Tale, which would be the best investment for the new retiree if instead of retiring in 1969 they were to retire in 1970, 1971 or 1972 and choose between the two same funds over the next 25 years? Most people don’t want to be tricked again so they change their answer. They select the American Mutual Fund instead of Fidelity Magellan. If you changed your answer you once again answered incorrectly. The Fidelity Magellan fund is in fact a better investment if you retired in 1970, 1971 or 1972 even though you would have run out of money had you retired in 1969. The answer changes when you change the period. When you retire matters as well as how you choose to invest.
This is a short tale but it illustrates that from a planning perspective it is important to understand that a person that is working, saving and investing doesn’t have to worry as much about how his investments reach their destination nor when they start investing because time in is on their side and the mathematics of recovery doesn’t work against them. However, a person that has built capital and sees the end of their earning and saving years in the present or near future must think differently. It’s the same person but with two entirely different financial plans. Always know which person you are.