The Most Important Number You Need To Know When Thinking About Retirement

When meeting with clients who are about to retire I inevitably come to the question of how much money do you need each year to live on? Very few people have an answer to that question. If you don’t know how much you need how can you ever expect to know if you are ready to retire?

Let me give you an example: if someone asked you to help budget how much gas they might need for an upcoming road trip what would you ask them? Obviously you’d ask where they are going.  Now imagine they said they didn’t know.  There would be no way for you to help them because you don’t know if they are driving across the country or across town.

Knowing how much you need to live on is vital to preparing for retirement.  Unfortunately this means you need to budget, which is one of those things we all know we need to do but rarely gets done.  Once you have a handle on your budget you can adjust for anticipated changes in retirement and move on to reviewing how adequate your savings/income will be to meet your expenses.

Here are a few ways to quickly determine your annual living expenses:

·        Consider using an automated system like Mint.com or Quicken

·        If you aren’t accumulating any debt consider using your net pay for the year

·        Try one of the many online budget calculators (SBV budget calculator)

·        Set up an Excel spreadsheet and track all purchases

Lastly, make sure to factor in any changes to your budget in retirement such as higher health insurance premiums, additional travel expenses, or higher entertainment expenses.  The more accurate your estimate of annual expenses the better prepared you will be to transition into retirement.

3 Reasons Retirees Should Stay Invested In This Market  

The S&P 500 has dropped over 4% from its September high as of this writing.  Foreign markets, commodities, and commercial real estate (REITs) have dropped more with some even negative for the year.  All of this has made many investors very nervous that the decline may get worse.  Recent retirees may be even more nervous since they are just starting to live off their savings.

Many recent retirees are wondering; should I sell my stocks to prevent further declines that would jeopardize my retirement?  I believe that’s a bad idea and have compiled several reasons why. 

1.  Timing the market is incredibly difficult if not impossible.  Selling your stocks now is making a bet that the recent decline will continue.  Research by Vanguard has shown that moving in and out of the markets with the hope to avoid declines is a waste of time. You are more likely to hurt your portfolio returns than improve them. Remember, you have to be right twice to time the market successfully – both selling at the correct time and then buying back in at the right time.  Many people may have sold before the worst of the 2008 decline but missed all of the eventual recovery and the new highs that came after.

2.  The recovery tends to come quickly and last longer than the declines. The stock market can turn on a dime and with no warning.  Usually the upswing happens when all the experts agree the market will continue to decline. Missing those critical upswing periods can cost you significantly.  On top of that, bull markets are three times longer on average than bear markets.  Even if you are 65 and just retired, you still have significant time on your side to wait for a recovery.

3.  You need stocks as a portion of your portfolio to keep up with inflation and make sure you don’t run out of money in old age.  Few of us have enough saved to live off our principal alone throughout retirement.  Most will need growth to keep up with rising costs and to ensure we don’t run out of money if we live to 100.  While bonds can be an important diversifier and stabilizer in a portfolio, rates are very low today and may not provide the protection retirees need.  Having a portion of your money in the stock market is an excellent way to protect yourself from inflation and to help ensure your money lasts as long as you do.

It may be difficult to watch as the market fluctuates but temporary declines are a normal part of investing.  The stock market pays us a risk premium to deal with these declines and staying invested is the best way to make sure you earn the return you deserve for bearing the risk.

4 Ways Changing Your Brakes and Managing Your Portfolio are Similar

1.  It takes time.  Changing your brakes might take you a couple hours or all weekend depending on whether or not you know what you’re doing.  Managing your investments takes time too.  You should review your investments once a quarter to make sure your portfolio is still in balance, to check for tax loss opportunities, and to ensure your funds are performing as expected.

2.  It takes expertise.  The majority of people who own cars wouldn’t dare change their own brakes.  They don’t know how to and they don’t care to learn.  The same can be said for your portfolio.  Are you willing to spend the time to educate yourself about the nuances of proper asset allocation? Or learn the intricacies of tax location optimization? What about researching the most cost-effective mutual funds?  It isn’t impossible to learn but it does take knowledge to effectively manage a portfolio.

3.  It takes willingness.  Many people have both the time and the expertise to change their own brakes, they simply don’t want to.  On a less technical scale, I am guilty of this.  I used to change my oil in college.  Once I graduated I stopped changing my own oil and started paying someone else to do it.  I could do it but I don’t want to.  For some, investing is exciting but for most it’s easier for someone else to handle it so they don’t have to.

4.  You risk getting it wrong.  The major reason I don’t change my own brakes, aside from the first three reasons listed, is the fear of doing it wrong.  If I mess up and my brakes fail then I have a serious problem, potentially fatal.  If, when managing your own portfolio you make a mistake, you may not even know it.  A great example would be selling stocks in a panic when the market is down.  Those that sold out at the bottom of the 2008 crash missed out on an enormous 5 year stock market rally.  This could potentially ruin the financial plan for someone close to retirement.

There are some people who have the time, expertise, and willingness to manage their own portfolios.  For others, one or more of the previously mentioned reasons is enough to consider hiring a fee-only, objective financial advisor to help manage their money.

Build Your Portfolio Like You Build Your Fantasy Football Team

This time of year everyone who plays fantasy football is in the midst of
drafting their team. An enormous amount of time and energy will be spent
researching this year’s potential sleepers and busts. If only we spent that
much time building our portfolios.

A basic fantasy football team is made up of a quarterback, two running
backs, two wide receivers, one tight end, one flex player, one defense and
one kicker. Everybody ends up drafting at least the appropriate number of
players to fill each of those slots.

But when the average person invests they end up owning many funds that do
the same thing. I see it all the time; someone will have six US large cap
stock funds and claim they are diversified. This is the fantasy football
equivalent of drafting six quarterbacks when you can only play one.

A properly diversified portfolio will include US large and small cap stocks,
international large and small cap stocks, emerging markets stocks,
commercial real estate (REITs), commodities and various types of fixed
income. These are the building blocks of a solid portfolio.

After you finish this year’s draft consider checking your investments to
make sure your portfolio is as well diversified as your team.