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The 3 Phases of Retirement Saving (Plus, How to Avoid the #1 Mistake)

Saving for retirement is never easy, but it gets even more challenging if you don’t shift your priorities at the right times. Today we examine the three phases of retirement saving, and discover the most vital change in perspective most people never make until it’s too late…

The 3 Phases of Retirement Saving (Plus, How to Avoid the #1 Mistake)
Photo by Bonnie Kittle

From Peter Reagan at Birch Gold Group

Saving or planning to save for retirement in 2022 is getting more challenging as each day passes.

Inflation is still accelerating and stealing your purchasing power at an annual rate of 9.1%. Economic growth is volatile. The housing market is falling apart at the same time.

On top of all that, even notorious optimist Federal Reserve Chairman Jerome Powell confessed the strong possibility of a deep recession starting this year.

To assist us in coming to terms with these challenges, here's some common-sense advice for shoring up our retirement savings. For example, Robert Gilliland, managing director and senior wealth advisor with Concenture Wealth Management suggested:

"What you want to do is run your plan to adjust for this new paradigm, which is probably going to be higher interest rates and a higher cost of living."

In other words, don’t make the mistake of ignoring inflation’s corrosive effects on your purchasing power! If you’re considering how a variety of assets perform over time, make sure you’re looking at “real” (after-inflation) numbers.

Gilliand also suggested a “stress test” of your portfolio. Make sure you can cover your expenses under various scenarios, including the current economic conditions.

The article suggests that you consider the current economic conditions and adjust your target retirement date accordingly, if necessary. After all, there’s an awful lot of economic forces and factors we can’t control. It’s prudent to focus on what we can control.

However, if you’re nearing five years before or five years after retiring (the retirement “red zone” as Prudential puts it), consider at least one more thing:

Make sure your retirement won’t get stuck on the “hamster wheel.”

Here’s a description of what that is, and one antidote…

When to consider safer growth

Kristian L. Finfrock, an investment adviser writing for Kiplinger’s, describes saving for retirement in three phases:

  1. Accumulation
  2. Preservation
  3. Distribution

For those of us born without a trust fund or inherited generational wealth, these phases nearly always occur in this order.

Let’s briefly describe each.

Phase 1: Accumulation

When you’re younger, long-term investment might not seem like much of a priority. (When I was in my twenties, I spent a whole lot less time thinking about my financial future, and a whole lot more chatting up strangers in nightclubs.) Your income tends to be low, especially at first.

You have a lot of competing priorities, and setting aside money for retirement some 40+ years away might not seem urgent. It might not even seem important. At that age, it’s hard to imagine even turning thirty, let alone turning 65…

However, as you might guess, the accumulation phase is often what sets you up for long-term financial security – one way or the other.

The most important thing accumulators have that the later stages don’t? Time. Lots and lots of time, enough for even modest savings to compound and grow.

As Finfrock says, during the accumulation phase,

"it’s generally OK to take some risk… you’ll likely be fine, because you have plenty of time to regrow your money"

Taking “some risk” in financial markets can be a good thing! As Dr. William Bernstein reminds us, in finance, “risk and return are joined at the hip.” Analyst Ralph Wakerly summarizes:

"Generally speaking, younger investors will have lower savings and a long investment time horizon. Therefore they will also have higher return goals. This provides them the ability and need to take risk to reach their retirement goals."

Decades to ride out bear markets, too, because it’s a whole lot easier to watch your IRA balance decline when you know you won’t need the money until well after your hair turns gray. This sort of long-term perspective enables you to feel detached while the economy moves through cycles of growth and contraction.

As your live and work and invest, your retirement savings will (hopefully!) grow.

Eventually, thanks to canny decisions or aggressive saving or plain luck, you’ll reach the next phase.

Phase 2: Preservation

As we near retirement, our need to take on risks typically declines. We’re most likely still working, still contributing to retirement savings, but with a different outlook. During the accumulation phase, our primary resource was time. During the preservation phase, our primary resource is our capital.

To put it another way, during the accumulation phase we had little to lose and a lot to gain. The preservation phase flips this around – we now have more to lose than we have to gain.

Finfrock describes the preservation phase as,

"the stage of life when you need to be thinking about how you’ll provide your own paycheck from your savings… You’ll still want some growth, but you should dial down your portfolio risk to better protect your money. Because we’re living longer, this stage still requires significant strategizing."

We switch from playing offense to playing defense. And this is very important, because you have much less time to recover from mistakes!

Phase 3: Distribution

This is what we think of as “retirement.” Instead of saving, we’ve reversed course and are now enjoying the fruits of our hard-won labors. Most of us won’t be able to continue adding to our savings – so we’d better have as much as we’re ever going to need (plus whatever we want to leave behind for our heirs).

Reflect for a moment on which of these three phases you’re currently in.

Now, let me tell you a little about the danger zone bridging phases two and three…

The retirement “red zone”

Prudential, the insurance and investment management company, developed the concept of the “red zone” as the five years before and after your retirement date. This is a particularly critical period because you no longer have much of a chance to recover from mistakes.

Sequence of return risk is particularly high (check out the link for a description). An economic downturn during these red zone years can derail your financial security for the rest of your life.

Finfrock calls market volatility during this period a “hamster wheel,” and it’s an understandable analogy! When the economy is booming, it’s tempting to stay on the wheel for just a little bit longer… But during a recession or an economic contraction, you might find yourself unwilling to sell assets and lock in your losses.

He suspects that’s because people who find themselves on the hamster wheel never mentally transitioned out of the first phase:

"Unfortunately, all too often I see people go straight from accumulation to distribution without adjusting their portfolio mix or looking into investments that provide safer income. They continue to invest as though retirement is still a long way away, even though they are soon to retire or are already retired. Then... they’re forced to sell investments for income. They’re depleting their savings faster than planned and drastically increasing their risk of running out of money later in life."

The hamster wheel is not a place you want to find yourself. Especially when the economy is volatile and uncertain.

To get off the hamster wheel, Finrock says we need to change our approach – to remember the mental transition from accumulation to preservation.

Pivoting from offense to defense

Remember, at some point, either because of capital growth or running short of time, we reach a tipping point where we have more to lose than to gain. Shifting your mindset from growing your savings to protecting your savings could help you make the decisions necessary to improve your financial security even in challenging economic times.

How? Here’s what Finrock recommends:

"You’ll still want some growth, but you should dial down your portfolio risk to better protect your money. Change your mindset. Instead of focusing strictly on growth, think about how much you’re comfortable losing at this time in your life. [emphasis added]"

For most of the people we speak to at Birch Gold, the answer is, “Not much.”

Maybe they’re thinking of Warren Buffet’s famous investing advice:

"The first rule of an investment is don't lose money.

And the second rule of an investment is don't forget the first rule."

Ask yourself how much you’re comfortable losing at this time in your life. it’s a good time to learn about assets that can help you preserve your savings?

Physical gold and silver are safe-haven investments relied upon for centuries by people looking to preserve their savings and their purchasing power. Diversifying with physical precious metals is one option to help smooth out volatility – and if you’re stuck on the hamster wheel, this might be exactly what you need to stop running and start living.

I strongly encourage you to figure out if you’ve brought an accumulation mindset into the preservation phase of saving for retirement. Consider how much you’re comfortable losing right now, today – and whether or not you could realistically recover from a major economic meltdown.

If you want to learn more about transferring some of your hard-earned retirement savings into a precious metals IRA, you can learn more here.

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