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Improving your retirement life by harnessing portfolio management principles
Jim was an investor client of mine in his 70s. He was tactically sophisticated and hyper-focused on his portfolio planning. At a number of points over the years, I tried to widen our conversations beyond finances to discuss the point of his accumulation efforts—what did he hope to gain from his gains? He showed little interest, even as he and his wife developed a variety of low-grade chronic conditions that signaled a need for lifestyle changes.
After many attempts to engage Jim beyond the portfolio, I backed into a conceptual framework that helped him see a bigger picture—ironically, by applying portfolio management principles to managing his aging.
Maintaining resilience through portfolio management principles
Portfolio management as a discipline offers principles that broader retirement planning can apply in surprising ways. For example, one generally accepted portfolio management principle is to minimize volatility for a targeted rate of return. We want to get paid (the rate of return) appropriately for the amount of risk (volatility) we take on. Or said another way, we don’t want to take risk that isn’t rewarding us enough over time.
Many times, instead of blindly trying to maximize upside by maxing out risk, the portfolio objective could be maintaining the portfolio’s purchasing power over time while muting some of the downside effects of volatility. Good investors diversify risk, preserve optionality, reduce fragility, and avoid forced decisions. The portfolio embodies planned resilience. Conditions are set to remain cool, calm, and collected, even during major market swings.
Because Jim was a good investor, he was very comfortable with these ideas. Sensing an opening, I told him I think he should apply those same principles to managing his family’s retirement.
Intervening early preserves optionality later
Jim had told me about his widowed mother, who showed symptoms of mild cognitive impairment when she lived alone, which the family delayed addressing because she was “mostly fine.” After she had a small car accident and confusion during a hospitalization, however, some family members began to panic and push for placement in a memory-care facility. This caught Jim’s mother completely off guard, increasing her resistance and eroding her trust in her family when she needed it most.
Jim confided that the aggressive late interventions made him regret not taking more gradual, adaptive transitions. At the same time, he categorically refused to game out any scenarios where he himself might be less able—a contradiction that is frustratingly common among us all as we age.
Many decisions about late-life housing and healthcare are made in crisis, and those decisions often reduce flexibility. Families often pursue maximum intervention when making a knee-jerk response before asking a more important question: Does this preserve future maneuverability?
Sometimes the best decision is not the most aggressive one. It’s the one that keeps options open longest.
I told Jim that he should think about incremental adaptive adjustments in his life as preserving optionality. What happened to his mom was at least partially due to compressed decision-timing, which could be thought of as “decision liquidity.” He appreciated the framing and even volunteered, “Maybe my wife and I could review our situation for opportunities for small supportive changes like I review my portfolio for opportunities to rebalance.”
I was getting somewhere!
Avoid concentration risk with your aging strategy
Portfolio managers know concentration risk is dangerous because too much dependence on a single asset, sector, or strategy can magnify losses if conditions change unexpectedly. Strong portfolios survive by spreading risk across multiple exposures so that one failure does not destabilize the entire system.
Now think of an aging strategy entirely dependent on one exhausted spouse. That’s a concentrated risk. So is a retirement plan dependent on one unsuitable house. So is a family where only one person understands the finances, medications, legal documents, or care logistics.
Single points of failure work poorly in portfolios. They can be catastrophic with aging.
Jim was literally falling into this trap. He insisted on remaining in his large two-story house because, “This is where the memories are.” But Jim had a fall the previous year, which he brushed off as, “So I tripped once or twice, no big deal.” His daughter had asked to change out some furniture, move some rugs, and reduce some clutter, but he refused.
I explained to Jim that I knew from experience with senior housing that people who fall are overwhelmingly likely to fall again. This didn’t land with him, so I used the single point of failure concept from portfolio management: “Jim, when you fell before, your wife became the whole operating system while you recovered. The house, as it is right now, isn’t helping the two of you thrive. It’s becoming a risk to your independence.”
I stuck with the investment framing to keep him engaged. “It’s like an investor defending a legacy asset long after it stopped functioning well in the portfolio. You know emotional attachment is a big reason investors refuse to exit a concentrated position. You have solved concentrated position risk over the years with me in your portfolio, maybe you should apply the same logic to other areas of your life at home.”
I wasn’t sure I got through to him until his daughter told me later that he let her in the house to throw out some junk, move some rugs, and even install a grab bar in the bathroom. Baby steps!
Reduce forced decisions so that you are planning and not reacting
Effective portfolio managers avoid forced selling because liquidating assets during periods of stress, volatility or depressed prices might lock in losses at the worst moment. Temporary market declines turn into permanent capital destruction.
Retirement has its own version of forced selling: forced healthcare and housing decisions made under exhaustion, fear, and time pressure. Delayed planning creates compressed timelines. Compressed timelines produce reactive decisions. And reactive decisions are usually expensive—financially, emotionally, and relationally.
I eventually used this logic to have Jim bring his wife and daughter to a broader planning meeting. We explored scenarios about staying at home or moving to another setting if either Jim or his wife needed help or died in different orders. We weren’t making any decisions, mind you, we were just bread-crumbing some possibilities to see how we would react financially. More importantly, we wanted his wife and daughter, the successor decision-makers, to feel like they were part of the planning and that they would have a voice in what decisions were to come.
His daughter told us at the end of the meeting that the exercise was really helpful. Memorably, she said to Jim, “Part of the reason this was so good was that my plan with Mom was just to sell everything to lock down the money if you die, Dad.”
Jim rolled his eyes when I gave him the side-eye.
Match your strategy to your reality
Too many portfolio plans operate like a permanent accumulation strategy without modeling out distributions. Similarly, most holistic aging plans still default to Peter Pan assumptions that we will retain our physical and cognitive ability until the very end.
This is often not the case.
One of our jobs here at AATM is to help families build adaptive decision systems.
This is where language and principles from other professional disciplines, such as portfolio management, can help with framing and responding to challenges as we get older. Concepts like decision liquidity show how you can not only manage your wealth intelligently but also your decision making. It’s the most reliable way to maximize your options when life choices become difficult, emotional, and uncertain.
I was glad that I was able to get through to Jim while he still had decision liquidity. By taking that approach, you can steer your retirement and your life toward what you want instead of what you are left with.
Related: Your Success Depends on One Thing: Who’s in Your Inner Circle?