While no one disputes that he's earned the title of "The Oracle of Omaha," there's also no denying that Warren Buffett's approach to stock picking isn't necessarily right for all retirees. His favorite holding period is "forever," but with a personal net worth of well over $100 billion, he can afford to be so bold. Most everyone else must adjust their portfolios for safety and income once their work-based wages stop and they start living on their retirement savings.
Still, much of Buffett's sage advice applies to retirees as well as it does to anyone else. Here's a rundown of five of his best nuggets of wisdom that everyone should consider, but particularly retirees who need to make their current stash of money last as long as possible.
1. Start with smart defense
"Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."
It seems obvious, but it needs to be reiterated -- you can survive subpar returns from time to time, but you only get to suffer a major wipeout once. After a big chunk (or even most) of your capital is gone, there's just not as much left to plug into a recovery. For instance, a 50% setback on a million-dollar portfolio drags its value down to only $500,000. A 50% rebound, however, only restores it to $750,000.
Such a setback isn't necessarily catastrophic when you're still working and have an income coming in while you wait for your retirement investments to bounce back. When you're drawing on the very same portfolio that's been upended though, you're making a bad problem even worse.
2. The nickels and dimes add up faster than you think
"Investors should remember that excitement and expenses are their enemies."
This is true for investors at all stages of life. It's a particular risk to retirees, however, who suddenly have a great deal more time to watch the market than they did while they were working. The more you watch it, the more prone you are to making a move out of boredom rather than out of purpose.
And the nickels and dimes add up faster than you might think. Even if your trades are "free," a buy-and-hold strategy reliably outperforms frequent trading specifically because the market's short-term volatility is rooted in fear and greed, which means you're often paying a little too much for a stock, and never getting quite enough when you sell it.
3. Even cash poses a kind of risk
"Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value."
It's admittedly a bit ironic to hear it from Buffett when roughly one-third of Berkshire Hathaway's value is cash and near-cash instruments like short-term government Treasuries. That's a strategic, disciplined decision though, and not the norm. He's simply waiting for the right opportunity.
His bigger point is, of course, that while cash may be safe, it's not fruitful, barely keeping pace with inflation. Even the highest-yielding money market funds are only paying on the order of 4% right now, which is fine for a short while, but not for the long haul.
Whether you want to or not, you'll need to invest in something if you want to make your money last through the entirety of your retirement while you're also spending it. A mix of stocks and bonds seems to work for most retirees. It's just a matter of figuring out the proper proportions.
4. Credit card debt is still a risk at this stage of your life
"Interest rates are very high on credit cards. Sometimes they are 18%. Sometimes they are 20%. If I borrowed money at 18% or 20%, I'd be broke."
In some ways, this is a nod back to the second key Buffett quote that retirees should embrace: Expenses are your enemy. That's largely in reference to investment-related costs like management fees and commissions though.
In this case, he's specifically talking about personal spending using credit cards. If uncontrolled, their high-interest payments can chew through your discretionary income to start eating into your money earmarked for basic living expenses, and eventually, into your retirement savings themselves.
Image source: Motley Fool.
But Buffett's figures are dated. The average interest rate on credit cards held by U.S. consumers now stands at just under 30%, which is far more than the average annual return of about 10% you'd probably achieve even if you remained 100% invested in the stock market (which most retirees shouldn't).
Bottom line? This isn't a time of life to take on any unnecessary credit card debt even if you've got the option to do so. You'll want to maintain as much fiscal flexibility as you can at this time, even if it means downgrading your lifestyle by a bit.
5. Simpler is always better just because it's easier to manage
"Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick 'no'."
Finally, in some ways it's a reacknowledgement of Buffett's very first rule of investing: Never lose money. This is also good stand-alone advice though, for one overarching reason. That is, not only does the additional time you'll have in retirement to manage your money mean you're apt to be more active, but it also means you're prone to trying more complex investment strategies or taking on more risk than you'll actually be able to manage.
Options trading and leveraged exchange-traded funds (ETFs) are just a couple of examples. Complex strategies and unconventional holdings don't behave nearly as predictably as individual stocks do when the environment changes (which it frequently does). Simpler is better just because it's clear how to best manage any unexpected twists and turns.
That's not to say these esoteric tools don't have their place. For most investors though, they can easily do more harm than good. They certainly bring more risk to the table than additional potential reward, and often end up being more enriching to the people or companies touting them than they are to individual investors.
