Local Columns
Keys to a successful retirement investing strategy
By Jeff Bogue
Editor's note: This column represents the fourth in our monthly series on an array of issues of importance to area seniors. Each entry is prepared by residents, nonprofit organizations and specialists in a variety of fields exclusively for readers of The Independent.
Investment strategy is as much art as it is science. Developing a portfolio for the rest of your life has its unique set of circumstances and is totally different than saving during your pre-retirement years. Here are keys to a successful game plan:
Focus on needs. It's about the lifestyle you want to lead. Determine your cash flow needs after pensions, Social Security and other non-investment sources; this is what you need from your investments and the required rate of return. This translates into an asset allocation of stocks, bonds and cash to fit these needs. What if you aren't comfortable with the risk required to accommodate your needs? That's when you have to decide between accepting risk and scaling back your anticipated lifestyle. Although many factors influence this, if you have at least a moderate level of growth in a diversified portfolio you should be able to draw 3 to 4 percent of your account value annually, adjusted with inflation.
Plans over performance. Basing investment decisions on what's "hot," chasing yield or continuously searching for the investment that's working now is a losing battle. It's because you are forced to react to what "Mr. Market" has to offer; and he will do a wonderful job at disappointing you. In comparison, having a disciplined asset allocation approach based on your needs is proactive in nature, forcing you to take action over your future rather than the market doing it for you.
Growth isn't optional anymore. The greatest risk is longevity where most people once did not have a retirement to one where a most people do. Life expectancy was 47 in 1900; now it's 78. This is compounded by the major expenses of retirement; travel and recreation in the early years to health and/or long term care costs in later years, which are growing faster than inflation. Most people can't afford the luxury of a low-risk portfolio that's main objective is income and principal preservation. Growth isn't optional for the retiree of today; it's a necessity.
Have a safety valve. Volatility is a killer. Retiring at the beginning of a bear market and being forced to withdraw investments in your initial retirement years at market lows can be a disaster, severely increasing your likelihood of running out of money during your lifetime. To protect yourself, you should have one to three years worth of cash flow needs, after pensions, Social Security, etc., in cash equivalents to tap into during severe market conditions.
Create a distribution system. This simply is creating an ongoing process. This entails several subsets: When to take periodic distributions; develop a system on when you are going to tap into your accounts periodically. Quarterly is ideal once you have a good grasp of your needs. When to rebalance your portfolio; you need to make sure your asset allocation doesn't stray too far away from your originally determined breakdown. In most circumstances, periodic withdrawals from the portfolio can accomplish this, but you may need to adjust your balances regardless in volatile market conditions or if needs change. Account type and tax situation; coordinate the tax ramifications of the investment accounts you have with your tax circumstances. For example, Roth accounts are tax free, Traditional IRAs or 401(k)s are taxable as ordinary income when withdrawn and regularly taxable accounts vary depending on the type of interest, dividends or capital gain income you have. Align this with your tax circumstances. For example, the percentage of Social Security that is taxable depends on your taxable income. This may prompt you to tap into your tax-free Roth IRA for cash flow needs to minimize taxable Social Security. Or what if you have a high balance in your traditional IRA and future required minimum distributions at age 70 ½ will place you in a much higher tax bracket? You may want to take some distributions now so you will be in a lower bracket later. There are a wide variety of possible situations; the better your think this through, the more tax efficient you will be and more money will be in your pocket.
No such thing as a "guarantee." Risk is unavoidable and is inherently natural. For example, a CD may protect against losing principal, but after inflation, what you could have bought with a five-year CD when you originally purchased it may not buy the same amount when it matures. The trick here is not to avoid risk, but to manage and minimize it. Lately there are many financial "products" being heavily promoted with guaranteed benefits. If you can work your way through the details and fine print, many times the cost of the guarantee isn't worth the amount of risk that is truly mitigated. Caveat emptor on the fear-based sell.
By following these simple steps, you will be spending more time enjoying what is important and less time toiling with your finances.
Jeff Bogue is the principal of Bogue Asset Management, an independent fee-only financial planning and investment advisory firm based in Wells.
