Few people reach retirement with perfectly allocated and optimized 401(k)s or IRAs. Only about 45 percent of all workers even have access to a workplace retirement plan at all, according to the Washington, D.C.-based Employee Benefit Research Institute. But if you do have one, chances are good you have more than one.
The nature of the employment system is that people accumulate accounts as they change jobs, and they often end up with a hodgepodge of investments that leaves them vulnerable to risk of all kinds, including a portfolio that’s so volatile it could take a dip just when you need the money, a portfolio that is so conservative you lose to inflation, or a portfolio that is not optimized for taxes.
A snapshot of the U.S. retirement market tells the story. Of the $23 trillion in retirement assets, more than half is in 401(k)s and IRAs, and the rest is in defined benefit plans, annuities, state and local pension plans and an array of other financial vehicles, according to the Investment Company Institute’s most recent 2014.
Just beginning to think about what you need to do may be the hardest step. But ignoring your portfolio could come at a high cost if history catches you at the wrong moment. At the end of 2007, investors were woefully weighted with stocks, according to the Employee Benefit Research Institute. Nearly 1 in 4 Americans ages 56 to 65 had more than 90 percent of their account balances in equities at year-end 2007, and over 2 in 5 had more than 70 percent. Equities declined nearly 40 percent the following year, wiping out billions in retirement savings for many retirees. It forced many near-retirees to delay stepping out of the workforce.
So now, as the economy hums along and the market reaches new highs, it is a good time to re-calibrate that retirement portfolio against volatility that may strike at any time.
1. Figure out what you need. Most financial advisors will tell you that as you enter your 50s, you should have a firm idea of the budget you’ll need in retirement. So before you begin, you’ll also have to have a clear sense of your required monthly income.
**According to The Federal Reserve’s Survey of Consumer Finances, a typical American household in the 55-to-64 age range has accumulated about $120,000 in retirement assets, only enough to produce $400 to $500 of monthly income before Social Security. The typical Social Security benefit is about $1,887. If that’s not enough, you’ll need to make some changes.
2. Save more, and extend your working life. The most effective lever you have for a successful retirement portfolio is to save more. That means increasing your contributions during your working lifetime or work longer.
**Suppose you need $80,000 a year in retirement. If you can continue to earn $100,000 a year for five years past your expected retirement date and put aside $20,000 or $30,000 of that a year, you will have added a total of six to seven years of income to your portfolio. You can also increase your Social Security benefit 76 percent a month by delaying your claim from 62—the earliest year you’re allowed to claim—to 70.
3. Diversify. If you want to lower the unexpected reality of volatility within your portfolio, diversify among various asset classes. That means owning mutual funds instead of individual stocks and having multiple asset classes represented instead of just one; emerging markets stock and bond funds in addition to domestic stock and bond funds. Equally important, keep your fees low.
** Vanguard expects returns for a balanced portfolio of 60 percent stocks and 40 percent bonds over the next 10 years to range from –3 percent to 12 percent, with the most likely scenario between 1.5 percent and 7.5 percent a year on an annualized basis. Equities alone are forecast to have a return centered on the 6 percent to 9 percent range, but with a possible swing from year to year of 18 percent. Bonds expected returns are in the 1.5 percent to 3 percent range. The translation: You’ll probably earn nearly as high returns with a balanced portfolio, but you’ll face much less volatility.
4. Design your asset allocation with an view of taxes. If you have significant holdings outside your retirement accounts, think through which asset classes belong in your retirement account. You’ll save significantly on taxes if you keep the equities—which you may buy and sell more frequently as you re-balance—in your retirement portfolio. But don’t make your portfolio decisions only around your tax savings; optimizing your investment returns and keeping your principal safe is a higher priority.
5. Equities should not to be avoided. Don’t make the mistake of significantly selling all of your equities and shifting into money market funds because you think they are safer. That would likely be too conservative for the long term. If you look at the returns of equities and cash every year since 1926, equities lost value in 1/3 the time on a real basis but cash also lost money 1/3 the time too, because of inflation. Most experts recommend that in retirement you have at least a 20 percent allocation to equities.
6. Periodically re-balance. You’ll be retired for a long time, so in order for your money to keep working in the best way possible you need to continue selling high and buying low as a process, which is what re-balancing does for your portfolio.
You devoted a lifetime to accumulating assets, put these steps into action and protect your hard earned dollars. More importantly, work closely with a competent, qualified, independent and objective financial advisor.
The information contained herein does not constitute tax or legal advice. Any decisions or actions should not be made without first consulting a financial professional or attorney.
For more information contact us at 845.563.0537 or Contact@CompassAMG.com
The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.
Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.
Steve DiGregorio
Compass Asset Management Group, LLC 