Organize, Share, Simplify
Your plans for retirement involve more than just financial calculations. You also need to make sure that those you care about understand your plans and have access to important information.
Here are a few steps to consider:
• Periodically update your beneficiary designations. These will supersede instructions in your will.
• Make sure important documents and records are easy for your family to locate. These should include your will; trust documents; insurance policies; a detailed listing of your assets, including account numbers and dollar amounts; and a durable power of attorney.
• Involve your family. Because your financial decisions affect your spouse and other family members, you should prepare them to assume responsibility if necessary. Discuss your plans with them and make sure they are familiar—and comfortable—with your decisions.
• Simplify your finances. It may be beneficial to consolidate your assets with a single company. This can lower your expenses and make it easier to track your financial situation and calculate your Required Minimum Distributions (RMD) each year. It can also reduce your paperwork at tax time. In addition, it can ease the transition should a family member have to take charge of your finances.
ADJUST YOUR PORTFOLIO
Before you begin drawing income from your investment portfolio, it is prudent to adjust your investment mix so it is more appropriate for your current circumstances.
Here are some common misconceptions regarding retirement portfolios:
Myth #1: Stocks are too risky for retirees.
Not necessarily. If you were comfortable with a certain proportion of stocks in your portfolio before you retired, chances are that you’ll be comfortable with that same proportion for some time during your retirement. Although we may recommend reducing the proportion of stocks as you move further into retirement, you may still want to maintain the growth potential that stocks can provide.
Myth #2: Bonds are the best investment for retirees because they produce income.
The interest that bonds generate can be an important source of income (possibly tax-free), and bonds can provide the balance and diversity critical to all portfolios. But you may also need stocks in the mix. Although past performance doesn’t guarantee future returns, retiree portfolios usually need the kind of inflation-beating growth that stocks have historically delivered.
All investing is subject to risk. Bond investments are subject to interest rate, credit, and inflation risk.
Myth #3: For safety, stick with short-term reserves.
Short-term reserves, including money market funds, bank certificates of deposit, and U.S. Treasury bills, do offer stability and relative safety. As a result, they can be a great source of liquidity or a place to store cash temporarily. But historically, short-term reserves have barely kept ahead of inflation and typically yield far less than other types of investments. Most retirees should not keep a significant portion of their assets in these kinds of accounts.
Maintain Some Liquidity
When you have unexpected expenses, a small liquid account—usually a money market account—can help you avoid having to sell portfolio assets at an inopportune time. Depending on your circumstances a cash cushion equivalent to one year of living expenses can help ease your mind and allow you keep your other assets invested for future retirement needs.
Plan For Inflation
It is very important to consider the impact of inflation on your financial plan. Too many times this silent stealer of money and purchasing power is overlooked or ignored. Even at a moderate 3% annual inflation rate, you’ll need income of about $270,000 in 20 years to buy what $150,000 buys today.
A Balanced, Diversified Portfolio is Important
Inflation is only one factor we will consider in evaluating your investment mix. One type of investment alone—stocks, bonds, or cash—is not likely to maximize a portfolio’s success. A mix of investments can provide the balance of growth, income, and stability that allows a portfolio to better withstand the fluctuations in financial markets.
We will aim to create a balanced and diversified investment mix and control risk as much as possible, rather than concentrate solely on producing the highest portfolio returns. But keep in mind that diversification does not ensure a profit or protect against a loss in a declining market.
