Manage Your Retirement Investments Better in Under an Hour
A 3-step plan from the CEO of a financial services firm for retirees
When you’re nearing retirement or already retired, you probably aren’t too concerned about beating the market every quarter or making the hottest stock picks. You just want enough money to meet your needs. But how do you know if your savings will be sufficient?
Here are the three steps you can take (in under an hour!) to improve how your retirement investments are managed:
Step 1: Start With your Longevity (Time: 10 minutes)
Why it matters: If your primary retirement savings goal is to make your money last, estimating your lifespan helps you plan for how long you’ll need money (your “time horizon”) and how much you can spend every year.
Your expected lifespan should influence many aspects of your financial plan like when you should start taking Social Security and whether it makes sense to buy an annuity. In general, it’s smart to be conservative and plan to live longer than estimates say you will. If you die earlier, you’ll leave some money on the table, but that’s better than dying later than expected and running out of money.
What to do: Start at the Social Security Administration’s website and look at the "life expectancy" column for your gender. Then, use a free health-based longevity calculator, like one from MetLife, John Hancock or (my favorite) Abaris. (My company, True Link, also includes this calculation as a part of our retirement investing tool.) Record these numbers, along with how long your parents and grandparents lived, and do this for your spouse as well.
The two things you should take away are how long you're likely to live and whether you'll be expected to live longer than the Social Security Administration thinks. How long you'll live affects your time horizon and budget, and whether you'll outlive expectations affects financial decisions you’ll make. For example, a person who expects to live a long time, other things equal, should take Social Security later, keep IRA distributions low, purchase an annuity (especially a deferred one), choose growth-oriented investments and buy little or no life insurance.
Step 2. Identify an Appropriate Equity Percentage (Time: 20 minutes)
Why it matters: Stocks (or “equities”) can go up and down in big ways, but they typically recover over time. Bonds, on the other hand, tend to go up and down in small ways and, therefore, don't need much time to recover. The percentage of your retirement investment portfolio you’ll want in equities will depend on how close you are to retirement — the nearer retirement is, the smaller the equity percentage.
What to do: An easy way to guesstimate an appropriate equity percentage is to look at a few different target-date mutual funds, which are a mix of stocks, bonds and other investments geared for people retiring when you think you will. For instance, a 2020 target date fund might be for retirement starting in 2020.
But if your calculations from Step 1 have you living longer than the Social Security estimates, you’ll need to adjust your percentage. For example, if you’re retiring in 2020 and expect to outlive the average person your age by five years, look at target date funds for 2025.
Once you have chosen the appropriate year, look at target date mutual funds from a fund family like T. Rowe Price or Vanguard to view their present investment mix. Add up the totals for domestic and international stocks, and you’ll be able to ballpark an equity percentage that suits your needs.
Now, you’ll want look at your own portfolio and add up the total percentage of stocks you currently have. Once you know how your investments compare to your target, some changes might be necessary, such as buying more stocks to keep pace with the rising cost of living if you’re under your target or reducing your stock percentage if you’re over.
But it’s important to note: buying or selling positions can have significant tax implications, so it’s a good idea to speak with a financial expert before making adjustments.
Step 3. Identify High-Fee Investments to Get Rid Of (Time: 5 minutes)
Why it matters: Because fees compound over time, they can eat up a surprising portion of your savings. For example, if you're charged a 1 percent advisory fee plus 0.6 percent in internal expenses (a fee structure common with traditional brokers), you'll have 13 percent less money than if you were charged a flat rate of 1 percent. And if we’re talking about 13 percent of $250,000, a loss of $32,500 is a lot of money.
What to do: Robo-advisers like SigFig and WealthFront as well as my firm (True Link) provide tools that can identify high-fee investments in your portfolio. If you chose not to use one of these, contact your broker or investment adviser and ask for the total amount you pay in fees every year and how these fees break down by type and investment. Then (being mindful of tax implications!) you can go down the list and weed out any high-fee investments that are draining your savings.
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