“If you’re on retirement’s doorstep, don’t just sit there. If you’re on retirement’s doorstep, say five to 10 years away from the day you want to call it quits, now may not be the time to do nothing,” writes the always interesting Robert Powell (editor of Retirement Weekly) in a marketwatch.com piece headlined It’s time to double-check your retirement plan. Other excerpts from the article:
“Let’s start with the big picture. Have you identified how financially ready you are for retirement?
“Fidelity Investments suggests that you need 10 times your final salary in your nest egg by age 67 to fund your retirement lifestyle. If you’re not on track, consider one or more of the following tactics: increase your savings rate, retire later than planned, change your asset allocation, and reduce your current and/or future standard of living.
“If you’re on track, and even if you’re not, now is a good time to revisit your asset allocation, how much you’re supposed to have invested in stocks, bonds, and cash, and determine whether your current asset allocation is out of whack with your investment policy statement or IPS.
“The IPS is document you should have created when you first started investing and the one you should have revised and updated at the end of 2015 or start of 2016. Among other things, your IPS tells you when to rebalance your portfolio, when to adjust your allocation back to its target asset allocation.
“Now would be a good time to create an IPS if you don’t have one, or double check whether there’s any need to tweak your portfolio. This document and this document alone should dictate what you do with your investments — whether you sell or buy or do nothing — not your emotions.
“Now’s a good time to review whether your psyche, not just your portfolio, can handle all this volatility. As those who study behavioral economics know full well, investors dislike losses more than we enjoy gains, by a two to one margin. Losses make investors anxious and question everything. Given that, don’t let the declines in the market psyche you out unless the losses trigger action required by your IPS.
“Revisit too, something we’ll call your capacity for risk, how much money you can lose before it starts to adversely affect your proposed retirement lifestyle. Yes, it’s good to know what percent declines your portfolio can suffer (down say 5% or 10%) without it adversely affecting your proposed standard of living in retirement. But it’s also good to know the absolute dollar amount you can lose without it putting a damper on your future lifestyle.
“And to know that you need to know this: What’s the bare minimum portfolio you need that will produce sufficient income to fund your retirement? If you have a $1 million portfolio and can withstand a loss of $100,000 before it adversely affects your lifestyle then that’s the point at which you would rejigger your portfolio. Again, it’s your plan — not your emotions — that dictate when and what you’ll do.”