When most people think about retirement, they picture this momentous event: the day they finally stop working. In many ways, this is much like planning a wedding. Couples and families spend months (some even more!) planning and preparing for the big day, making sure all the important details come together to make it “perfect.” But in reality, the “real work” begins after the wedding; it’s the marriage itself.
Similarly, retirement isn’t just an event; it’s a stage of life. Retirement planning shouldn’t stop at the transition from working to not working. A successful retirement plan should sustain financial health for decades to come.
And for many, that stage can last 30 years or more. If we include the years leading up to retirement, the horizon stretches even further. That’s why your investment strategy must align with this long-term reality.
We can’t predict the future, so how can we plan for over 30 years? Rather than focusing on the unknown future, we should start with what we do know (or at least strongly suspect).
To thrive as an investor in retirement, you must clear two significant obstacles. The first and most obvious is market volatility. We know that markets will experience highs and lows. The stock market moves up and down, and downturns can feel unsettling. Over the next three months or even a year, we can’t predict what will happen. But over the next 30 years? Downturns are inevitable.
Corrections or market drops of 10% or more from market highs occur regularly. In fact, data from YCharts show the S&P 500 has had 13 such corrections since 1990. That means investors can expect one every two or three years on average. Although we should note that some years experience zero corrections, and others have had multiple, so performance is highly variable. If historical patterns are any indicator, we can expect another 12 such corrections during the next 30 years.
Some of these corrections turn into bear markets, which are declines of 20% or more. Since 1990, four corrections have turned into bear markets. Historically, extreme bear markets such as the 2008 financial crisis or the early 2000s tech bubble have seen drops of 40 50% or more.
Over a 30-year retirement, based on the historical pattern, we can expect another three or four bear market declines. As with milder corrections, the appearance of bear markets is highly variable. For example after the 2008 bear market ended in 2012 we did not see another one until 2020 during the early days of COVID.
Some recover quickly; others can take years. Accepting this reality can help you stay focused on the long-term plan rather than reacting emotionally to short-term swings.
The second obstacle and maybe less obvious is inflation. Until recently, many of us had almost forgotten about inflation which had been on the decline since the early 1980’s. Inflation erodes purchasing power and the value of our investments permanently. Even if the Fed achieves its policy goals and the economy experiences a steady 2% rate of inflation, that modest annual rate, after 10 years, will still result in a roughly 20% loss of purchasing power. So what does that mean? Well, 20% inflation has the same impact as a 20% bear market decline, but without a chance of recovery. Unlike market declines, inflation does not typically reverse except during severe economic recessions, which are thankfully rare. This makes it a persistent challenge.
One of the best weapons against inflation over time has historically been stocks. The conundrum we face is that investing in stocks brings us back to the first obstacle: market volatility.
This is why it is vitally important to establish a proper investment allocation that can allow you to participate in the market to help overcome inflation throughout a 30-year voyage of retirement. Simultaneously balancing market risk for a consistent and sustainable ride is key for a long-haul journey, whether that’s investing for retirement or a long-term commitment.
Disclosure
This content is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product or services nor tax or legal advice. This content is provided solely for your personal use and shall not be deemed to provide access to any particular transaction or investment opportunity. Quotient Wealth Partners, LLC does not intend this information to be investment advice, and the information presented should not be relied upon to make an investment decision. Any third-party information contained herein was prepared by sources deemed to be reliable but is not guaranteed. Quotient Wealth Partners, LLC, is not affiliated to any specific companies mentioned.
