What's your long-term investment plan for retirement? Given widespread forecasts for economic and political turbulence at least through the 2012 national elections, even the concept of "long term" carries little meaning. Maybe it's through next week? Or maybe you will just hope for the best and do your party imitation of an ostrich during the next year?
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At times of great uncertainty, even conscientious retirees with solid investment plans may scramble for what they should do next. At such times, it can help to have some guiding principles to help carry you into a volatile future.
As part of its ongoing retirement research efforts, investment firm Charles Schwab has developed nine "Retirement Income Fundamentals." The company's recommendations are based on consumer research of Americans' retirement situations and needs.
Schwab provides assistance on each fundamental, with decision-making tools, "next step" suggestions, and places to find additional information. You'll notice the fundamentals are not based on current market conditions. Rather, they are parts of a process that makes sense for different investment environments. Also, these fundamentals are not new or unique to Schwab. You'll find them widely used by many financial advisers and investment firms.
Here are the nine tips, as described by Schwab:
1. Review your situation. Know how much money you've earmarked for retirement, where you keep it, and how much, if anything, you want to leave to heirs.
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2. Maintain a year of cash. Set aside an amount equivalent to what you'll need from your portfolio for at least a year. This is the money you'll use—along with your regular sources of income—to cover all expenses throughout the year.
3. Consolidate income in a single account. When possible, you may want to deposit your regular sources of income into the account where you keep your year of cash. Or, you might choose a similar type of account where funds can be easily transferred.
4. Match your investments to your goals and needs. As you begin to rely on your investments for income, you may feel most comfortable investing heavily in income-generating bonds and CDs. But to counteract the long-term effects of inflation, you may need to keep a portion of your savings in growth-oriented stocks as well.
5. Cover essentials with predictable income. Divide your expenses into "essential" and "discretionary" categories and cover the essentials with predictable income sources.
6. Don't be afraid to tap into your principal. Chances are, you'll need to supplement interest and dividend income with measured withdrawals from principal. And while it's natural to be concerned about spending your savings too quickly, there are ways to help tap your portfolio with a high degree of confidence that your money can last.
7. Follow a smart portfolio drawdown strategy. To supplement your predictable income sources such as dividend and interest income, Social Security, pension payments, and rental income, consider drawing money from your retirement portfolio in this order: Start by drawing principal from maturing bonds and CDs; take your required minimum IRA distribution if you are 70½ or older; sell overweighted assets in your taxable accounts; sell from your tax-advantaged accounts starting with Traditional IRAs, then Roth IRAs.
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8. Rebalance annually to stay aligned with your goals. Annual portfolio rebalancing is especially important when you're retired. There's less time to recover from the potential losses of lackluster returns caused by a portfolio that has strayed from your chosen asset allocation.
9. Stay flexible and re-evaluate as needed. Things change. Situations change. Markets change. Priorities change. It's important to periodically revisit your portfolio asset allocation to stay aligned with you broader investment goals.
These fundamentals apply to all market conditions, but the ways they are implemented are very much influenced by the current environment, notes Rob Williams, director of fixed income and income planning at Schwab's Center for Financial Research.
"The retirement fundamentals reflect what we know is a challenge to retirees in the market today," he explains. "Turning the switch from savings to spending in retirement" can be very difficult. "That's especially the case today given the uncertainty in the market climate and the challenging interest-rate environment," among other factors.
The need to set aside funds and build a solid portfolio don't change, but investment preferences do. "I do think we are seeing more risk aversion" in investor behavior, for example, Williams says, "and I think there are good reasons for that." Judging risks more conservatively is still consistent with solid financial planning. Running scared in light of market volatility is not. Fear, Williams says, is not really a plan.
In surveying more than 1,000 Americans ages 55 to 70 about their retirement situations and needs, Schwab recently found that most people feel they've done a good job of dealing with major spending and budget plans. However, even many people who felt they were in good shape for their retirement years were uncertain about how they should set up investments to generate the steady income payments they would need.
Here's a look at how people have planned for retirement expenses, including issues they have spent time on and ones that don't have a high priority:
| Preparedness About Retirement Expenses | ||||
|---|---|---|---|---|
| Prepared | Unprepared | Worried | Don't Care | |
| Basic living expenses | 86 | 10 | 3 | 1 |
| Discretionary expenses | 69 | 20 | 2 | 9 |
| Taxes | 64 | 24 | 5 | 7 |
| Healthcare expenses | 60 | 26 | 12 | 2 |
| Giving money to charities | 56 | 10 | 1 | 34 |
| Leaving an inheritance | 43 | 9 | 1 | 47 |
| Expenses for an aging parent | 37 | 10 | 2 | 51 |
| Expenses for adult children | 33 | 13 | 4 | 50 |
| Source: Charles Schwab survey of Americans aged 55-70 | ||||
Twitter: @PhilMoeller
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