If you read my posts with any regularity, you are by now aware that I am a big advocate of people preparing early for their retirement. In fact, the sooner you start, the better off you will be by a long shot over someone who waits until they settle into a “real” job. If you or your kids work, you should be saving some portion of your salary for retirement. For compounding to work at its maximum, it is best to start saving in a ROTH IRA while you are a teenager. If you cannot open an account on your own, have your parents open one for you. The benefits of doing this at an early age will allow you to reap huge dividends when you reach retirement age. But if you are already in your 40s or 50s now is an optimal point in your working career to take stock of where you are at with your retirement situation. Any later, and you will be playing catch up from behind the Eight Ball.
Do not let volatility spook you
When we are younger than 40, we tend not to think about things the same as when we are approaching retirement. Yes, when you are younger, you can withstand more volatility without causing you sleepless nights because you know time is still on your side. But the older we get and the closer we get to our retirement date, the less we like to see volatility in the markets. But regardless of your age, there will always be market volatility to contend with, so try not to lose too much sleep over the fact that by nature, the markets are indeed volatile.
On the whole, the markets, despite being volatile, tend to go up as a rule. In the past 39 years, 22 of them have seen double-digit declines in the markets. But 75% of the time out of those 22 years, the markets ended with a positive return for the year. This means out of the last 39 years, approximately five years have not seen positive growth in the overall markets. So, the lesson here is not to let volatility rule your investment decisions and panic when the markets are being particularly volatile. And as history has shown us, we tend to panic when the markets go down, fearing we will lose what we have saved and sell at the wrong time out of fear because our emotions got the better of us. Avoid undue risk but do not sell out of fear when the market goes down as history has shown us; it rarely stays that way and will come back.
Avoid unnecessary risk
Volatility is one thing, and taking an unnecessary risk is another matter altogether. So, what is the key here? Well, as we get closer to retirement, we do need to re-evaluate the risks we take in our portfolios. While I do not recommend that anyone at any stage of their lives get completely out of the stock market, you do need to be mindful of your asset allocation. The reason I do not think anyone should entirely get out of stocks and equities is that we are living longer in our retirement years and therefor need the capital appreciation that equities provide our portfolios.
As you get closer to your retirement age, it is prudent to shift some assets from equities to fixed income in the proper percentages. If you need assistance with this to seek the help of a fee-only Registered Financial Consultant and work with them to arrive as the correct asset allocation that makes sense for you and your situation and do not think that the only choices are equities and fixed income as asset classes as countless others need to be considered as well depending on your comfort level.
One way to avoid some risks and provide yourself with a reliable stream of income is to look into purchasing an annuity. While these are not a prudent choice for everyone, they can be a powerful tool in your retirement plans if you are afraid of outliving your assets and find an annuity that meets your needs. Beware as annuities are extremely complex financial instruments, and it is wise to have someone assist you in purchasing these instruments. But they can reduce some of the risks in your portfolio if used properly.
Look at what you spend
If you are approaching retirement or in retirement, I am a firm believer in the use of budgets to fully understand what money you have coming in and what and where you are spending that money. Without a budget, it is far too easy to overspend regardless of your age. But if you are not working and rely on Social Security, annuities, pensions, or your savings as your sole sources of income, you really cannot afford to overspend.
But the good news is that most people tend to spend less as they age regardless of income and wealth. That is because if you had kids, chances are they are supporting themselves at this point, the house should be about paid for, and expenses, in general, are on the decline. But that does not mean you will automatically spend less once you retire as numerous studies have shown that many people spend earlier into their retirement, but after a few years, that levels out to a large degree.
And if you are close to retirement and find that you may not have saved enough or planned properly, working a few more years is always an option. If you decide you do not want to work, many full-time retirees do have part-time employment that helps to supplement their retirement income. The key here is to play with the figures and see what works for you and your situation.
And above all, be flexible
Things are rarely set in stone and tend to change constantly. Most plans never go as intended and often go astray almost as soon as we set things in motion. So, the key here is to be extremely flexible in what you do and remember things should always remain fluid. The unexpected always comes up, so prepare for it the best that you can and go with the flow of things. If the markets are up and you are in retirement, consider selling some assets to have about two- or three years’ worth of cash to live off of in the event things do not go as planned.
Retirement can now be as long as your working career, so you must properly plan for it, and the sooner you start, the better off you will be. Get invested in the markets and stay that way, ignoring the market’s volatility yet respecting it with using proper asset allocation. And expect the unexpected when making your plans as things tend to go astray and not work out the way we planned.
If you have any questions or need any assistance, please feel free to contact me or reach out to a Registered Financial Consultant. To join our email newsletter, please fill out the form below.
