By John Persinos
The markets are closed today in observance of Memorial Day. For many investors, it's a much-needed reprieve.
At our family's annual Memorial Day picnic over the weekend, financial anxiety was (again) on the menu. My elderly parents expressed their persistent concern that they'd outlive their savings. My folks actually lived through the Great Depression and they're having painful flashbacks. As is their wont, they pressed me for advice.
When it comes to money, I try to turn these two worriers into warriors. I reminded mom and dad that they had a sensible strategy in place, with the proper portfolio allocation, and they should just stick to their plan. Their current allocation, geared for stability in full retirement, is depicted in my chart below.
Do you, too, suffer from retirement-a-phobia? It's a common malady. I'll show you basic steps to help conquer it.
According to a recent survey conducted by the American Institute of Certified Public Accountants, 41% of CPA financial planners report that running out of money is their clients' top concern about retirement, even including those clients who have a high net worth.
America truly faces a retirement crisis. Millions of people will end up too feeble to work, but too poor to retire. If you doubt me, consider these frightening statistics.
A Federal Reserve study found that four in 10 American adults wouldn't be able to cover an unexpected $400 expense with cash, savings or a credit-card charge that could be quickly paid off.
According to a survey conducted by Bankrate, one in five U.S. adults have nothing saved for retirement or emergencies. That's right. Nothing.
Bankrate, a consumer financial services company, found that a further 20% have saved only 5% or less of their annual income to meet certain financial goals. Less than a third of all Americans have saved at least 11% or more. The chart tells the grim story.
From millennials struggling with massive college debt to profligate baby boomers who've put away almost nothing, the situation is dire.
According to Fidelity Investments, by age 60 you should have eight times your salary saved to live comfortably in retirement. How do you stack up? Perhaps you're like my parents and you fret that you'll outlive your investments.
If you feel behind the eight ball, you needn't despair. It all starts with a focused plan.
Choosing the Right Baskets
All too often, retirement investors don't follow an allocation plan, which means they're flying in the dark. Because 401k plans or Individual Retirement Accounts (IRAs) are invested for the long haul, investors tend to push them to the back of their minds and neglect calibrating their holdings according to an asset allocation strategy. Over the years, that sort of neglect can dampen gains and increase risk.
Asset allocation is a continual process, not a one-time event. It is the process of selecting among disparate investment choices and combining them to achieve adequate returns while reducing volatility.
Asset allocation is one of the most crucial decisions in investing. Investors build long-term wealth through three basic activities: selecting specific investments to buy; deciding when to get in and out of the markets; and establishing asset allocation.
The first two activities are the hardest and least forgiving. However, asset allocation is the easiest to determine and it wields the most power. According to some financial industry studies, asset allocation explains 93.6% of the variation in a portfolio's quarterly returns.
Before getting to work on your portfolio's asset allocation, first think carefully and answer these questions:
- What's the purpose of your portfolio?
Define your portfolio's purpose. Here are some examples: to reap a lot of money over the short term, so you can make a big purchase such as a house; to generate reliable, future cash flow in retirement; to grow the family estate for your kids and grandkids; to set aside ample cash reserves for entrepreneurial investment opportunities; etc.
- What's your stage in life?
For example: relative youth (aggressive growth); middle age (moderately aggressive); retirement in the next 10 years (income and moderately conservative); retired (stability and income).
There are several variations. Chose a category based not only on your approximate age, but also on your tolerance for risk.
- How much wealth do you already have?
What's your current net worth and how close is it to your ultimate goal? Do you already have a head start, which allows you to shoulder more risk, or are you starting from scratch?
- What's your self-imposed requirement for a minimum rate of return?
Do you want to reap at least 10% a year? Do you want to at least equal-or beat-the S&P 500? The younger your age, the higher you can set your goals. But be realistic.
- What's your risk tolerance?
If your portfolio takes a sharp turn for the worse when you're in your 40s, you still have plenty of time to bounce back. But if your investments take a nosedive while you're, say, 65, you're in a far worse predicament.
- Will your financial situation likely get better, deteriorate, or stay the same?
Are you securely ensconced in a paying job that will remain steady for the next few decades? Are you about to retire? Are you afraid of getting laid off?
- Will there be any withdrawals?
If you plan to start taking out money, how much will you withdraw and when?
- What are the regulatory requirements?
Don't be blindsided by unforeseen rules and regulations. If your portfolio is a 401(k) or IRA, what are the mandatory distribution requirements?
A Marathon, Not a Sprint
Basic asset classes include U.S. stocks; international stocks; bonds; precious metals; real estate (e.g., real estate investment trusts, or REITs); and cash and cash equivalents (money market). The appropriate percentages depend on your answers to the above checklist.
I suggest these age-contingent categories: 1. relative youth (15 years from retirement); 2. middle age (5-15 years from retirement); and 3. advanced middle age/senior citizen (5 years from retirement or, like my folks, currently retired).
Chose a category based not only on your approximate age, but also on your tolerance for risk. As long-term market history amply shows, you'll have to withstand a lot of bumps along the way.
To help you visualize the mental discipline necessary for this process, my chart uses a marathon as a metaphor. My recommended allocations get safer, as you get older. (Because of uncertainty caused by the pandemic, it's a good idea to elevate your cash levels regardless of your stage of life.)
Keep in mind, I'm not referring to market timing. A common misconception is that you must time the market to succeed with your investment goals. Not so. In fact, most investors who try to invest at "just the right time" do the opposite.
They buy when the market has increased, and they sell when the market falls due to adverse political, economic and international events. A quick way to lose money is to dump inherently strong stocks just because of a scary headline. Tune out the daily scaremongering on cable news.
If you're still several years away from retirement, the safer you play it, the less effective your retirement plan.
If you're fully retired like my parents and you already have the right strategy in place, don't wring your hands and make impulsive decisions. This Memorial Day, don't fret about the latest bout of market volatility. Just have a beer and a hamburger and enjoy the holiday.
Questions about retirement investing? I'm here to help: mailbag@investingdaily.com.
In the meantime, if you'd like to accelerate the accumulation of your retirement savings, consider the trading methods of my colleague Jim Fink.
As chief investment strategist of Velocity Trader, Jim has developed a proprietary investing method that consistently beats Wall Street at its own game, in markets that are going up, down or sideways. His 310F trade is the most accurate way I've ever seen to double your stake in just three days.
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John Persinos is the editorial director of Investing Daily. To subscribe to his video channel, follow this link.
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