Three Myths About Investing for Retirement

Whatever you’ve been told about your retirement, odds are that it’s wrong. Saving enough for your retirement, and investing the right way, are truly among the hardest of all financial problems. In many ways, it’s more difficult than running a large endowment or hedge fund — and yet we all must do it.

The challenge is to make your money last a lifetime while facing uncertainty about the future of markets, your income, your health and your longevity. Meanwhile, all the misinformation and bad advice out there makes retirement finance harder than it needs to be. In an effort to make things a little easier — and with full knowledge that one column can do only so much — here are three myths about retirement.

Myth No. 1: The goal of retirement finance is to maximize the return of your portfolio.

The idea of maximizing returns is the original sin of retirement investing. I blame the evolution of wealth management. For many years, most Americans did not invest in financial markets. In 1962, only about 23% of US households owned stock, and most tended to be very rich. Their goal was to keep their pile of money as big as possible. There were pension funds that invested for retirement, but they did so on behalf of many people of different ages, so they had more scope to diversify.

But then people started living longer and wanted to be less dependent on their families, while defined benefit pensions were largely replaced by individual accounts. Suddenly (over a few decades), a majority of households had to invest for their own retirement. And the same strategies and conventional wisdom given to rich investors were applied to middle-class retirement investors.

A nation of investors

That was a mistake. If you just need to maintain a big pot of money, then returns on any given day, month or year do matter. If you are financing an income stream that needs to continue decades into the future, a different investing strategy — and way of judging performance — are required. You are essentially preparing to buy a 20-year inflation-indexed bond, and its value depends on both future long-term interest rates and asset returns.