Keep It Up
The good news is that one may live a good life for 20 or even 30 years beyond retirement. The bad news is … your retirement funds may not last that long. “You have to take this into account,” says David Freeman-Woolpert. “You must plan for long life and the expense of late-life care.” Freeman-Woolpert is a registered principal and financial planner with Altus Investment Group in Concord. There was a time when our parents or grandparents did well by investing exclusively in certificates of deposit, he says. But today, that approach will not provide the growth of assets that may be needed.
That said, are there guidelines for good financial planning in your 60s, 70s and beyond? The answer is yes, but one size does not fit all.
Seniors come with differing needs and goals. One might have a sizeable pension and no need for regular withdrawals from investments. Another has no pension and counts on income from investments. A good money management strategy for a 60-year-old may not be the best approach at 70.
Cecile Goff of Walpole suggests that you begin with a realistic assessment of needs. Goff is an Edward Jones investment representative in Walpole. She cautions, “Your expenses may not decrease upon retirement as much as you think.” The cost of maintaining a home is likely to increase. You may want to travel. There may be family expenses — health care, help for an aged parent or education for a grandchild. A good financial planner will take into account these needs before making recommendations.
A properly balanced portfolio is usually the best protection against the risks of investment, and all investment vehicles carry risk. Fixed income instruments such as CDs, bonds and treasury notes assure safety of principal, but risk the loss of purchasing power through inflation. Equities offer growth but carry the risk of market fluctuation.
“Inflation is the number one danger to your nest egg,” says Freeman-Woolpert. “If you are regularly withdrawing 4 percent of your assets, which are growing at 4 percent, there is no way to make your income keep up with inflation. But if some of your assets are in growth and income producing investments, earning 6 or 7 percent per year on average, you have something to put into offsetting future inflation.”
A balanced portfolio would often include equities or equity funds, high-quality bonds and cash or cash equivalents such as money market funds. Such a portfolio provides for growth, protection of some of the principal and liquidity for immediate needs. Freeman-Woolpert suggests having money for two years’ expenses in either liquid or short-term investments.
For an investor who needs income, yet wants long-term growth, many financial planners propose an approach known as risk-adjusted asset allocation. This approach combines two types of investments: a series of high-quality bonds (or other fixed-income vehicles) with staggered maturities, and mutual funds in different segments of the market. The staggered (laddered) bond portfolio provides immediate monthly income. Another way to plan for guaranteed income would be one of the newer annuities, with an immediate or short-term surrender option.
Equity mutual funds have taken a beating over the last few years; some investors are wary. But not all mutual funds suffered the same declines. Goff believes that mutual funds are still the best way for most investors to minimize market risks while participating in market gains. She cautions, however, that concentration in one sector or one geographic area increases risk.
New on the scene is the “lifestyle fund,” an equity fund that creates a mix of investments that is adjusted in keeping with age and other circumstances. It might, for example, shift assets from growth stocks to growth and income stocks as the client gets closer to retirement. These funds might charge a higher fee. Investors could accomplish the same goal by rebalancing their portfolios of two or three differing types. The guidance of a financial advisor would be important.
Freeman-Woolpert reminds readers to consider the tax implications of asset rebalancing. He recommends that one plan years ahead for the distribution of assets, noting the possibilities of charitable trusts and the new “stretch” IRA, which can spread the IRA in your estate over the life of the beneficiary.
Goff lists a few common investor mistakes. Be willing to sell a stock or fund that is doing well, she suggests, rather than waiting for that last bit of gain. And while “buy and hold” is often good advice, there are times when you should sell a loser. Don’t hang on, waiting for it come back up.
Financial planning is complex. Be wary of people who knock at your door with a “great opportunity” or a CD with an exceptionally high rate of return. Your financial advisor should be a person whom you trust, who has a track record in the community and is there when you need guidance. NH