The way you are thinking about retirement may be wrong.
It”™s true. For years, area investors gearing up for the big transition have used assumptions that are, at best, dated or obsolete. Current trends include major shifts that require serious consideration. Yet taking steps to close the knowledge gap and implement smart strategies now could put you in better control of your outcome.
Since 2009, the stock market has more than tripled but, that, of course, is yesterday”™s news. Despite a growing economy and the lowest unemployment rate in seven years, many investors share a pessimistic outlook. And for good reason: The global debt ballooned to an all-time high of $199 trillion last year. The U.S. Federal Reserve”™s much anticipated move away from a supportive monetary policy through interest rate hikes has been front-and-center in the minds of investors. Short-term pullbacks have been the norm over the past 30 years during tightening cycles. Not surprisingly, many equate rate hikes to more volatility.
As we get closer to retirement, the long-held prudent approach to asset allocation has been to allocate one”™s portfolio more conservatively. The definition of conservatism varies, but many times it involves actively adding bonds into a portfolio mix. Here is where it gets tricky. The fact that bonds have provided the needed counterbalance to stocks has been enhanced by a three decade-plus bull market in bonds. Since 1982, interest rates have declined by about 5 percent each year, creating a great run for bond investors. However, the quantitative easing (QE) programs in the U.S., Europe and Japan have caused ultra-low yields that are likely here to stay. Even the “risk adverse” have had to swallow hard while reviewing their money market or CD rates.
Investing in retirement is about managing risk and many are caught in the middle of a risk/return tug-of-war. Retirees overweight in bonds or CDs in the age of near zero rates must decide which route to take: chart a new course or risk not earning enough and increase the odds of running out of money. Every day headlines and newscasts will draw attention to the problems du jour. But outliving assets is the true risk in retirement, not short-term volatility of the capital markets.
The good news is that investors have a growing number of options that are designed to solve the problems outlined here. A careful review of your plans and some actions steps could make a big difference in the years to come.
It”™s a fact that many investors struggle to manage their portfolios relative to their individual needs. This typically results in portfolios with limited or no growth potential or portfolios with far too much risk. The first step should be a complete update of cash flow needs compared with all assets and income sources. Today, there are many online tools that will allow you to view all your finances in one secure place allowing you immediate control by seeing the entire picture. From there the biggest decision is whether you can “do this yourself” or need professional help.
Over the past few years, more investors have recognized that the future returns of many asset classes will likely be lower than the recent past. Determining what to do and implementing a personal plan remains the challenge. Examples of excellent investment solutions include target date funds and multi-asset funds. Both include professional managers that adjust the portfolio allocation in an attempt to lower risk at times or take advantage of opportunities as they arise. Since far too many smart folks have outsmarted themselves, these strategies can help by being unemotional. By including a wide spectrum of assets from domestic and international equities of all market capitalizations and various types of fixed income and alternative asset classes at times, these holdings can provide broad exposure and managed weightings. New offerings continue to pour out of the investment management world to address the new low-growth environment. According to Morningstar Research, 140 new fixed income exchange traded or ETF funds have launched since 2012. Now is the time to determine if your holdings are in-line with current trends and not “old school.”
Since the bear market of 2000-02, investors have been hit with waves of losses within their investment horizons. 2008 served as the ultimate wake up call for investors worldwide and the residents of Westchester and Fairfield counties were not spared. As the notion of risk has changed, investors need to be flexible and adjust their weightings to reflect the changing retirement landscape. As the oft-recited line goes, past performance is no guarantee.
Christopher P. Jordan is the founder of LEXCO Wealth Management Inc. with offices in Tarrytown and Greenwich. He has been advising affluent families in the area for the past 25 years and specializes in retirement transition. He can be reached by phone at 914-468-8912 or by email at cjordan@lexcowealth.com.
