They may not know it, but what many investors really want is for retirement to be a piece of cake. So how do they ensure that they get a great slice at retirement?
It should be obvious.
1. Start by picking the right type of cake for you.
Should seem simple right? It's amazing how many people miss this critical first step when planning their retirement. First and foremost, investors should try to figure out what retirement looks like. These days, retirement looks a lot different than it did 25 years ago. Life cycles used to be linear—people were born and educated, then they worked in a career, had a family, and finally, they entered into a leisurely retirement. Now life cycles look much different. It is not uncommon to see people living a non-linear life—they are born, educated, work in their first career, take time off, pursue a different or advanced education, work in their second career, become re-educated in a passionate interest, and then work part-time or volunteer during retirement and well into the sunset years. Investors who can figure out what retirement will look like for them will have a better idea of what kind of cake they really want.
2. Find a great recipe.
No one goes to the grocery store and starts buying the ingredients they think they need to bake a cake. Likewise, why would any investor start buying investments without a plan? Investments are expensive just like good ingredients, so don't waste money buying expensive bacon when it isn't used to bake a cake.
Getting (and more importantly paying for) a complete and comprehensive financial plan is the starting point for any investor looking to get exactly what they want out of retirement. Much like a good recipe, this plan should outline exact ingredients and precise amounts, when in the process the ingredients should be added, and how long to bake the whole mix.
Why pay for it? For the same reason people pay for a good set of building blueprints or a solid legal strategy—because retirement outcome is too important to be left to something that is offered for free. A word of caution: Don't fall for so-called "investment reviews" or other "goals-based" planning tools and studies offered by investment salesmen trying to gather assets. These tools are designed to drive sales success, not retirement success.
3. Buy the ingredients.
Just like a recipe tells what ingredients are needed for each type of cake, a complete and comprehensive financial plan will dictate what investments are needed for each individual retirement plan to be complete. Once those have been determined, the next step is just shopping.
Here is where investors go wrong. When they go to round up their ingredients, they shouldn't worry about what is in everyone else's shopping cart! Each person should stick to their great recipe because the other guy's cart may be filled with items for a barbecue!
If investors should remember anything, it is this: You bake your cake, let him have his barbecue. And please—if someone is handing out samples of terrific shrimp salad—don't be suckered into adding to your cart.
4. Follow the baking instructions.
A recipe gives the baker specific instructions on mixing and baking much like a complete and comprehensive financial plan gives the investor exact instructions on building and managing the investment strategy.
Investors need to remember to follow the plan.
Great cakes are made by mixing the right high-quality ingredients in the right amounts into the bowl and putting them in the oven at the right temperature for the right amount of time. Taking the cake out of the oven too early or applying the icing without letting the cake cool will ruin all off the baker's hard work.
Likewise, investors need to buy the right investments in the correct amounts and let them rise. That does not mean they don't have to watch them and check on them; it just means that if they follow the directions, there is a high probability of getting the desired results.
In short, investors should pick their cake, find a great recipe, buy the right ingredients and follow the directions.
David B. Armstrong CFA, is a Managing Director and co-founder of Monument Wealth Management in Alexandria VA, a full service Private Wealth Planning and wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. He has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 & 2010). David and Monument Wealth Management can be followed on their blog at "Off The Wall", their Twitter account @MonumentWealth, and on their Facebook page. Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references is historical and is not guarantee of future results. DJIA and S&P 500 are unmanaged indexes and cannot be invested into directly. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.