Common Retirement Advice Wealthy People Don’t Follow
Written by
Angela Mae
Edited by
Molly Sullivan
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Planning for retirement entails figuring out a great many things about your lifestyle goals, finances and long-term plans. It can be a complicated and lengthy process, one that involves determining how much to invest, which types of assets to have, how to allocate those assets, when to retire and more.
Because of this, many people turn to the experts for tried-and-true pieces of advice to help ensure they’re properly prepared for retirement and that they can live comfortably when the time comes.
But while there’s plenty of well-known retirement planning advice out there, not everyone adheres to the same advice. In particular, high-net-worth individuals often ignore common advice or combine it with lesser-known strategies. In some cases, this can help them maintain their wealth and lifestyle after leaving the workforce; in others, it can actually be detrimental to their overall financial situation.
Here’s some well-known retirement advice that wealthy people don’t always follow.
Have a Well-Balanced Portfolio
Having a balanced portfolio with a strategic mix of assets can help mitigate risks, reduce volatility and help you stay on track with your financial goals. However, not everyone follows this advice.
“Many wealthy individuals don’t stick to the common advice of maintaining a portfolio balanced between stocks and bonds, often recommended as 60% stocks and 40% bonds for the average investor,” said Jeff Rose, CFP and founder of GoodFinancialCents.com.
Focus on Income-Producing Investments
Income-producing investments like individual stocks and bonds, real estate and mutual funds can generate cash flow at any point in life — including during retirement. Since most retirees live on a fixed income, it’s generally considered good advice to have at least some income-producing investments.
However, some high-net-worth individuals focus more on growth-oriented investments instead of income-producing ones. According to Kevin Ross, CLU, ChFC, senior managing director at Bridgeway Wealth Partners, LLC, this is a mistake.
“There are two types of portfolios, an accumulation portfolio and a distribution portfolio,” Ross said. “An accumulation portfolio is one that’s in the accumulation phase where no withdrawals are being taken from the portfolio. A distribution portfolio is one that’s in the distribution phase where income distributions are being taken from the portfolio.”
Many retirees will continue to use an accumulation strategy during the distribution phase, but this can be risky.
“We are all aware that there are inevitable down markets. But many don’t realize the profound impact distributions have on a portfolio during down markets,” Ross said. “When investors who are accustomed to investing in growth-oriented securities hit a down market — which they inevitably will — they must sell off a disproportionate number of shares in order to reach the same monthly dollar amount they need to spend in retirement. A bad sequence of returns where a retiree is hit with down years early on can result in portfolio failure — the portfolio running out of money, long before the retiree’s life expectancy.”
There are ways to reduce this risk, such as by investing in income-producing securities with growth potential. If the market takes a turn, these investments will still generate income without the need to sell off any shares until their value increases again.
Avoid Taking on Too Many Alternative Investments
Alternative investments can be highly risky and volatile, meaning there’s a higher chance of losing a significant amount of the investment. They might also be less liquid or come with high fees. Because of these reasons, a typical investor might avoid these investments, or they might allocate a very small portion of their overall portfolio to them.
However, wealthy individuals don’t always heed this advice.
“According to various wealth surveys, high-net-worth individuals tend to have a higher allocation to alternative investments like real estate and private equity, often exceeding 20% of their portfolios, compared to the average investor,” Rose said.
Adjust Your Investment Strategy
Another well-known piece of retirement advice is to review and adjust your investment strategy based on your goals and needs. This is something many wealthy people do as well, but not all.
“Wealthy people tend to do exactly what they did to become wealthy,” Ross said. However, “it’s a bad idea to think the same accumulation strategy that enabled you to build wealth will work in retirement. Taking periodic distributions from a portfolio changes everything and requires a different approach — a properly designed distribution portfolio. Knowing this can mean the difference between a comfortable retirement and running out of money.”
Don’t Let Emotions Guide Your Investments
Letting your emotions guide your investments can make it harder to see the risks of a certain asset, or cause you to make poor financial decisions. This is especially common when those emotions are fear or greed. So, while emotional investing can sometimes pay off, it’s generally better to make your decisions based on sound investment strategies.
However, some wealthy individuals don’t heed this advice — or they follow it to varying degrees.
Rose gave an example of those who own concentrated stock positions in their current or previous companies. It’s often “difficult for them to remove the emotional tie to the stock because they spend so much time and energy investing into the company’s growth,” Rose said.
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