Why Your Retirement Planning Should Start with Understanding Wall Street

The following is adapted from The Retirement Secret.

If you look at most Americans’ retirement portfolios, you’ll find that the biggest component is the 401(k). 

Over the decades, the American retirement system has shifted away from pensions and Social Security and toward the 401(k). That means the vast majority of your investment options are likely stocks, mutual funds, bonds, and variable annuity account values, which I’ll collectively refer to as Roof investments because they fit at the top of your retirement “house.” 

What do these Roof investments have in common?

They all point to and depend on Wall Street. They’re susceptible to the daily rises and falls of the market. If you’re heavily invested in stocks, mutual funds, bonds, and variable annuity account values, no other force will have as much influence on your portfolio as Wall Street, which is why your retirement planning should also start with understanding Wall Street.  

Wall Street Investments Offer Growth

To understand Wall Street, it helps to understand why you would invest in Wall Street, or Roof investments. What advantages does Wall Street offer over other investment options?

Wall Street offers a few major benefits. The first is the potential for growth. The reason investors want growth isn’t really for the growth itself. Sure, it’s great to see your values go up, but what good does that actually do you? 

For someone in retirement, there are two reasons this can be really important: longevity and inflation. Many retirees seek growth because they don’t know how long their retirement will be, and they don’t know how much anything is going to cost in the future. For these reasons, you can’t just leave your money in a checking account or buried under your mattress—you need your money to grow or it will lose value. 

By growing your investments, you can ensure that your money outpaces inflation and lasts as long as you need it. 

Wall Street is Accessible and Flexible

In addition to growth, Roof investments also offer accessibility and flexibility. Many Roof options allow you to get in and out of them on a quarterly, daily, or even minute-by-minute basis. This access could be tremendously valuable if you have unexpected needs and must quickly access a portion of your nest egg. 

Easy access is beneficial not only in case of an emergency. It also provides valuable flexibility in case there is a need or desire to adjust the allocation of your nest egg. For example, there could be shifts in the economic landscape, changes to specific investment solutions, or transitions in your life or your goals. When these events happen, you don’t want all of your money to be locked up in inaccessible accounts. 

With Roof investments, you can sell and buy whenever the market is open, which means you can access your money at almost any time. 

Wall Street Allows for Dollar-Cost Averaging

The last benefit of Wall Street you should understand is that it allows for dollar-cost averaging. 

As Investopedia.com explains, “Dollar-cost averaging is a strategy that allows an investor to buy the same dollar amount of an investment on regular intervals. The purchases occur regardless of the asset’s price. A perfect example of dollar-cost averaging is its use in 401(k) plans. An employee can select a predetermined amount of their salary that they wish to invest in a menu of mutual or index funds.”

The beauty of dollar-cost averaging is that it helps you if the stock market were to drop. You see, if the stock market goes down, your 401(k) contribution is still buying shares. Since the share price has gone down, you will automatically buy more shares. When that happens, guess what you just did? 

You “bought low” and brought down the average cost of your shares. Over time, this averaging helps you weather the dips of the market and actually leverage them to enjoy greater returns. 

What are the Downsides to Wall Street?

No investment is perfect, and Roof investments on Wall Street are no different. So what are the downsides?

Roof investments provide the potential for growth, but that volatility also puts you at risk of loss. As a worst-case scenario, a stock market crash can swiftly wipe out any Roof investments you have. Alternatively, even if your money isn’t wiped out completely, a dip in the market will decrease your access to your money because you won’t want to withdraw it when the value is down. 

For these reasons, Roof investments are unsuitable for retirement income. They are a great vehicle for your money as you are saving for retirement and have decades to grow your wealth, but as you near retirement, you’ll want to shift away from these higher risk investments. That’s not to say you can’t keep any money in Wall Street when you retire, but you should not use Roof investments as your main source of retirement income. 

Fit Wall Street into a Diversified Strategy

As you can see, Wall Street has its pros and cons. It offers the potential for massive growth while remaining accessible and flexible, but it also puts you at risk for loss. 

The market can rise or fall dramatically on a day-to-day basis, so if you want reliable, steady income in retirement, Roof investments aren’t the way to go. However, they’re an excellent choice for growing a diversified portfolio in the decades leading up to retirement. 

By understanding the benefits and downsides, you can make better-informed decisions about where Wall Street fits into your investing strategy. The key to success is diversification—do not rely entirely on Wall Street as you grow your retirement portfolio, and avoid this even more after you’ve retired. Again, because of the potential to suffer significant losses, Roof investments should not be depended on for retirement income.

Instead, be smart about investing in Wall Street before shifting to income-generating investments, and you’ll make the most of Wall Street’s advantages. 

For more advice on investing for retirement, you can find The Retirement Secret on Amazon.

For over twenty years, Pat Strubbe has taught retirees and pre-retirees how to preserve their assets and increase their income. After watching his own parents struggle when his grandfather needed help, Pat made it his mission to help others avoid that pain. He has been featured in USA Today, Columbia Business Monthly, Investor’s Business Daily, and other national publications, and is a regular contributor on WIS News. You can listen to Pat host the radio show Save Your Retirement on WVOC (560 AM). Pat lives in Columbia, South Carolina, with his beautiful wife, Janelle. He’s the proud father of four children: Carter, Ava, Gabriella, and Isla.

Securities offered through Kalos Capital, Inc. and Investment Advisory Services offered through Kalos Management, Inc., both located at 11525 Park Woods Circle, Alpharetta, GA 30005, (678) 356-1100. Preservation Specialists, LLC is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.