I often refer to retirement planning as being the ‘journey’ or ‘path’ to financial independence. When stepping back from the granular details of investment analysis, tax efficiency, and itemized expenses, we can imagine our financial journey like a long flight across the country to our retirement destination. The parallels between the path to financial independence and a pilot’s journey are only limited to our imagination, and I have found it useful to view financial wellness from this unique perspective.
A plane has fuel (savings), passengers (investment choices), and airspeed (investment return). A flight experiences turbulence (market volatility) and detours (financial crossroads), but usually arrives safely as long as the pilot doesn’t jump out mid-flight (sell everything during a bear market)! I hope this extended metaphor and the following steps help you approach long-term investing with a new frame of mind – and ultimately lead to an improvement of your own flight path to retirement.
A pilot utilizes multiple resources to learn the science and art of flying, including hours of dedicated study and patient training before becoming the pilot in command. Becoming and remaining a long-term investor requires a clear understanding of what you are investing in, what you are investing for, and how you plan to avoid irrational behavior along the way.
Honest financial education is available through numerous forms of media, including books, blogs, YouTube channels, podcasts, conferences, and even free lunches (beware!). Many of these popular resources are free, but I suggest that you avoid financial information that focuses on dogmatic approaches to personal finance – like “always invest this way” or “all debt is bad” or “everybody needs this product.” Understanding both traditional and modern financial principles can help you create a plan that appropriately aligns your money with your values. Once you learn the mechanics of flight, you can start planning your route!
It is tempting to start investing before assessing your current financial landscape. A pilot never lifts off before creating a flight plan, checking the weather, and completing a nose-to-tail inspection. As investors, we must also understand where we are before determining where to go (and how to safely get there).
Create a Balance Sheet: Make a list of what you own (assets) and what you owe (liabilities). Add details about each asset and liability, including type (taxable and tax-deferred investment accounts, real property, credit cards, loans), account ownership, value, and interest rate. Subtract your liabilities from your assets to determine your net worth. This statement is a financial ‘snapshot’ – only showing a singular moment in time. Updating your balance sheet on a quarterly basis can raise your awareness and motivate you to increase assets and reduce/eliminate liabilities over time.
Mitigate Risks: We are familiar with the in-flight safety briefing before takeoff; the flight attendant demonstrates the emergency landing procedures, location and inflation of our safety vest, and even how to buckle our seat belt. We are told to review the safety information card in the seat back pocket, but most of us ignore that part of the briefing – “that won’t actually happen on this flight.” Many investors unfortunately ignore risk mitigation concepts like ensuring that adequate emergency funds and insurance policies are in place before investing. We will not likely need the oxygen mask during our flight, but we will be glad it’s there if we do! This also reminds us to put on our own mask before assisting others – the health of our personal retirement savings should be prioritized over the funding of higher education for dependents.
Calculate Your Time Horizon: Successful investing requires an appropriate alignment of investment risk (volatility) and personal risk capacity. It is important to give every dollar a due date, meaning how long from now you intend to liquidate the investment and distribute the money to cover expenses. An emergency fund is an investment example that has a short time horizon, as emergencies happen at a moment’s notice and require the liquidation and distribution of assets quickly. Liquidating an emergency fund that is fully invested in stocks could trigger an unfortunate realized loss during a bear market. Research the time-sensitive risk and return metrics of your investments – there are helpful resources available if you need more information.
Maintain Your Weight and Balance: Having too much cargo in one area of a plane can add unnecessary stress to its structure. Like avoiding too much weight on the nose or the tail of an aircraft, it is important to balance the asset allocation of your investments. The weight of your stocks and bonds will shift during flight, but rebalancing will realign your accounts with your personal investment philosophy. Also keep in mind that investment fees can be a major drag on your long-term retirement savings; seek to understand these costs and their return trade-offs so that you don’t lag behind.
A co-pilot assists the pilot in flight and may handle the radio communications and safety checklists. Think of a financial planner like a co-pilot; they don’t fly the plane, but they can provide a second pair of eyes to objectively help you along the journey. As mentioned in a previous article, there are different types of financial ‘advisors’ with varying areas of expertise. I suggest consulting a fiduciary financial planner in your area that has at least the CFP® designation and understands your financial independence philosophy.
It is not necessary to concentrate your time and mental resources on the granular details of investing. It is important to understand where and how your retirement accounts are invested, but adding automation to your journey can certainly provide relief. Find out if you can automate savings transfers at your financial institution, ask your employer if you can send your direct deposits to separate bank accounts, and automatically reinvest dividends in your tax-deferred retirement accounts. Paying yourself first (fueling up) and automating your investments will keep you on a disciplined flight path and allow you to focus on other important areas of your life – look out the window!
When you are diligently working and putting a healthy percentage of your income into retirement savings, this is called the “accumulation stage.” You have a clear understanding of how your accounts are invested, reviewing the radar (balance sheet) along the way until you have your retirement destination in sight. It’s time to fasten the seatbelt once more and prepare for landing – this part is exciting but can also be the most anxious part of an investor’s life. You have been preparing for the “decumulation stage” for decades, but actually sticking the landing requires clarity and its own preparation checklist. This is the moment when having that extra pair of eyes can be most valuable. Measure twice and carefully calculate your income distribution strategies to avoid costly, unintended consequences when approaching your financial independence date.
“Ding! You are now free to move about the country” – Southwest Airlines
The journey to reaching financial independence establishes your “why” – your personal reason to forgo today’s pleasures to save for tomorrow’s possibilities. Whether you wish to plant a financial family tree for future generations or have extravagant spending dreams for your retirement years, your journey is unique to you. When you reach your financial independence destination, take the time to embrace the freedom and enjoy your stay but also continue to establish new goals and flight plans; retirement is yet another journey in itself!
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