You’ve saved diligently over the years, frequently deferring gratification in the hopes of building a nest egg large enough to support you.  The ups and downs of the market have made you doubt your decision to invest money in the equity markets but you persevered and now your account balances are significantly large.  In fact, you may feel uncomfortable managing assets this large by yourself.  So, how do you begin to restructure your assets to live the rest of your life?

Time Frame for Investments

The first area to address in structuring your investments is your time frame. We base time frame on both your life expectancy and on your retirement date.  For a married couple age 65, there is a high probability at least one of you will live until age 92 and possibly longer, given advances in technology. It’s important to invest enough of your assets in growth securities that will outpace inflation and provide assets for your golden years.

Asset Allocation

The term asset allocation identifies your mixture of stocks, bonds, international, commodity, real estate, cash and other investments. There are many rules of thumb cited for how much someone should have in equities at given points in life.  We subscribe to none of them.  Instead, we rely on academic and empirical studies that have identified optimum asset mixtures at different phases of life, unified with an understanding to other aspects of your financial plan that significantly impact this decision (more below).  A common misconception is your asset mixture gets progressively more conservative during your lifetime.

In fact, it’s been proven we should be most cautious with your assets 2-3 years before retirement and 2-3 years into retirement.  This is the stage of life you can least afford to lose money.  Your assets are likely to be at their largest levels at this stage of life and you will spend down these assets over the remainder of your life.  In the event of a market downturn at this juncture, not only will your large bucket of assets decline, but you have limited working years to rebuild the assets before you need to begin withdrawals.  One of the most negatively impactful events to a successful retirement is a major downturn just prior or immediately following retirement.  To protect against such an event, it’s important that we invest most conservatively at this point.  Once we have navigated through these pre & early post-retirement years it’s possible to assume the additional risk if you need or want to.

It’s been proven that over 94% of the investment returns you earn during your lifetime are simply a function of how much money you have in each investment category, as opposed to which securities you own.  As a result, focusing on high-level asset allocation is more fruitful than over analyzing which fund or security to own.

Income Sources

A person’s income sources in retirement have a strong impact on your ideal asset allocation. The more income sources you have in retirement, the less need you have for bonds and other conservative assets.  Income sources that can dramatically impact your ideal asset allocation include guaranteed pension income, social income, deferred compensation payouts, inheritance, trust income, installment sale income, and more.

Taxable Income

Managing your current and future tax liability will impact your overall asset allocation. The more income sources you have in retirement (above), the higher your taxable income.  The higher your taxable income, the less you will want to have in income producing assets (within taxable accounts).  In addition, it’s imperative that we anticipate your eventual Required Minimum Distributions (RMDs) at age 70 ½ and beyond.  For those who have saved diligently in 401k, 403b and IRA accounts, these assets will eventually need to be pulled out, and in doing so, will create added taxable income.  There are several strategies that can be considered to manage this ticking tax bomb, including partial Roth IRA conversions between your retirement date and age 70 ½ when the RMDs must begin.

Rebalancing Assets

The discipline of selling some of your high performing assets and investing in lagging or lower performing assets is called rebalancing.  It’s important to consistently monitor your overall asset allocation before and during retirement and rebalance when certain investments become overweighted relative to your overall plan.  It’s been proven that rebalancing properly can reduce your risk and enhance return over time.  There are academic studies we employ that have proven how and when to rebalance to optimize your situation.

Logistics of Investing for Retirement

The end result you’re searching for is an investment strategy that helps you maintain your lifestyle and accomplish your goals in retirement.  Maximizing all of the issues cited above, we create systematic withdrawals from your retirement assets that are deposited electronically each month in your checking account.  We call this a ‘retirement paycheck’, because it creates the monthly income you’re accustomed to during your working years to facilitate your expenses, and in doing so provides the peace of mind you’re looking for in retirement.

Having a well-defined plan to invest your life savings is critical to a successful retirement.  One of the greatest benefits to having a time-tested plan is the elimination of worry for market movements.  By securing income, protecting an appropriate level of assets, and anticipating volatility, we remove your fears that come with investing in uncertain times.