In my last post we talked about how investing for retirement is different today than it was in the 1990’s. So if we agree that investing today is different, how should your retirement planning reflect that change? Every investor is unique and you should consult your financial advisor before making any investment decisions, but some people may want to consider the following action plan as they approach retirement.
#1)Create a retirement income strategy
How much do you need to spend in retirement and where will that money come from? If you need $5,000 each month to meet your basic spending needs and $3,000 will come from social security, pensions and other reliable income sources, where will the other $2,000 come from? Once you determine what your income needs are and how much money you can count on from reliable sources each month, you are in a better position to decide how much risk you can afford (or need) to take on other assets in retirement.
#2)Review your existing portfolio to determine how much market risk you need to take.
To determine how much market risk you need to take. Once you determine your spending needs and income sources, you may find that you don’t need to take much risk because your needs are met through reliable income sources like social security and pensions. So why take a chance? On the other hand, you may feel that with your basic needs being met, you can afford to ride out any ups and downs the market may give you.
#3)Consider reducing your exposure to the stock market
The stock market isn’t for everyone. Maybe it’s not for you. Even if it is, maybe you shouldn’t have (or don’t need) all your money in the market. Since markets rarely go straight up, if you want to reduce your exposure to the stock market it may make sense to pull money out when it is high and before the next market downturn.
#4)Focus on lower volatility stocks
For the portion of your assets that are allocated to stocks, seek out stocks and/or stock funds that have historically had less volatility than the market.
A lower volatility stock portfolio is one that seeks out those stocks or stock mutual funds that have historically experienced less volatility than the market average as a whole. Of course, the past is no guarantee for the future, but if you can lessen market losses when the market declines, you don’t have to make as much when the market rallies to get back to even. For example, a $100 investment that loses 50% of its value has to gain 100% to get back to even. If the same investment loses 20% it only has to gain 25% to get back to even.
#5)Think twice about your time horizons
Financial advisors like to use phrases like short-term and long-term, but what does that really mean? In my mind long-term is ten years or more. According to the Center for Disease Control, the average life expectancy of a 65-year old is 19.2 years. Even retirees should have a long-term view for at least a portion of their investments. Curiously, I worked with a number of clients in their 80’s who are fully invested in stocks and wouldn’t have it any other way. Many of them have secure retirement income from multiple sources and manage money with an eye towards the next generation. Maybe that will be you some day? Perhaps it is now.
#6)Be realistic about how much you can afford to spend
One of the biggest mistakes retirees make is to spend too much money. $1,000,000 might sound like a lot of money, but even $1,000,000 can be reduced to $0 if you take out too much too soon especially if you are spending money while the markets are in decline. Many experts believe that a withdrawal rate of 4% may be reasonable for someone retiring at age 65. But even that assumption has been challenged. Higher withdrawal rates can be even more problematic. In general, the higher the withdrawal rate, the greater the likelihood of running out of money someday. Some say even a 4% withdrawal rate might be too generous.
#7)Never forget that retirement is about a lot more than just money
And investing is about more than beating a market index. Ideally, money should be the least of your concerns in retirement. If you have to pinch pennies and worry about your investments everyday, maybe retirement isn’t the right choice – at least not yet.
I believe if you implement the ideas outlined above: create a retirement income plan, reduce your market risk and volatility, focus on the appropriate time horizons and be realistic about your spending, retirement should be a time when you enjoy your life, live the way you want (within reason), and with confidence.
Your best years are still ahead of you.
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