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. Few people reach retirement with
perfectly geared 401(k)s and IRAs. Only about 45 percent of all workers have
current access to a retirement plan at work at all.
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. 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.
The typical retirement-age couple walks in the door with
portfolios overweighted in equities. Now, as the economy and the
market rise, it is a good time to bulletproof your portfolio against the
volatility that can strike at any time.
1. Figure out what
you need. Any financial advisor worth will tell you that as you enter
your 50s, you need to have a firm idea of the budget you'll need in retirement,
so before you begin bulletproofing, have a clear sense of your required monthly
income. The typical household made up of Americans in the 55-to-64 age range
has accumulated only enough retirement assets—$120,000—to produce $400 to $500
of income a month to add to Social Security payments.
That typical retirement savings of $120,000 will produce
about $400 to $500 a month in income. The typical Social Security benefit is
$1,887.
2. Save more, and
extend your working life. The biggest lever you can use to bulletproof
you retirement portfolio is to put more money into it, which you can do by
saving more. And the simplest way to do that is to 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 volatility of your portfolio, diversify within and among
asset classes. That means owning funds instead of individual stocks, and owning
multiple asset classes instead of just one: a portfolio of emerging markets
stock and bond funds, plus domestic stock and bond funds. As always, keep your
fees low.
You can either diversify your own portfolio or buy a good
low-cost target date fund. Vanguard offers some; Fidelity Investments offers
the Fidelity Freedom Index Funds, which are similar. Just remember: in
order for a target date fund to work properly, your whole retirement account
balance needs to be in the fund.
4. Design your asset
allocation with an eye to 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 rebalance—in your
retirement portfolio. But don't make your portfolio decisions around your tax
savings; maximizing your investment returns and keeping your principal safe is a
higher priority.
5. Keep a healthy
portion of equities. Don't make the mistake of getting rid of all of
your equities and shifting into money market funds because you think they are
safer. If you look at the returns of equities and cash every year since 1926, equities
lost value in a third, but on a real basis, cash lost money in a third of the
years, too, because of inflation. Most experts recommend that in retirement you
have at least a 20 percent allocation to equities.
6. Relax and set
yourself up for automatic rebalancing. You'll be retired for a long
time, so in order for your money to keep working at the highest possible pace,
you need to continue selling high and buying low, which is what rebalancing
automatically does for you. A target date fund will rebalance automatically; so
will a number of online options and investment advisors.
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