The last few years of one’s working career are fraught withdanger when it comes to retirement readiness (see “The 9 Most Common Mistakes People Make Within 5Years of Retirement,” FiduciaryNews.com, June 7,2016).

|

Read: 3 general concerns that thwart retirementsaving

|

There is one thing, however, that those nearing retirement canand should do that just might beach life much more comfortable.It’s a tried and true method of organic asset allocation that"Modern Portfolio Theory" never taught you.

|

But first you need to address an important pre-requisite. Themillion-dollar question (often literally) faced by retirementsavers is “How much will I need to spend to live the retirementlifestyle I desire?”

|

A common heuristic in determining this is to assume your annualretirement expenses will be 80 percent of your salary. Indeed,rigorous studies dating back to the 1980s support thisassumption.

|

Read: Will the 401(k) MEP become the penicillin ofretirement?

|

Unfortunately, retirement spending is not a straight-line graph.Neither, surprisingly, is it upwardly sloping.

|

Most people in fact spend larger amounts during the first yearsof retirement. After that, they begin to spend less as the urge(and ability) to participate in more expensive activitiesdeclines.

|

So, it’s not unusual to see spending at 85 percent of the salaryin the first decade, then tail off to 75 percent (or less) in thesubsequent decades. (Remember, you need to assume you’ll bespending another 30 years in retirement – that’s threedecades!)

|

Using the 80 percent haircut might be useful early on whenyou’ve just started saving for retirement, but by the time you hitthe five-years-to-go mark, you probably ought to start sharpeningthat 80 percent pencil.

|

|

As you approach retirement, the concept of “retirement” beginsto crystallize. No longer is it a theoretical construct. It becomesclearer exactly what you’ll be doing during at least the first fewyears of retirement.

|

You begin considering your preferred post-retirement places tolive. You start collecting travel brochures and contemplatepossible itineraries. Fortunately, all these activities come withwell-defined price tags. This all helps you get a firm grasp onyour likely annual retirement expenses, at least for the first fewyears of retirement.

|

And that’s key. Once you’ve got a good idea how much moneyyou’ll be spending in the initial two to three years of yourretirement, you now have a target. But a target for what?

|

This is where organic asset allocation comes in.

|

Retirees must deal with two opposing factors. First is thereality (mentioned earlier) that they need to prepare to live foranother thirty years after retirement. That means “retirement” isnot some imaginary delimiting line where investments suddenly morphfrom long-term growth to short-term safety. No.

|

The bulk of the assets must remain invested for long-termgrowth. Any allocation that includes assets other than stocksconflicts with this need.

|

On the other hand, the potential damage of unfortunately timedmarket volatility is very real. Very few people can “self-endow”and live off the income generated by their retirement portfolio.Most will need to invade that principle. This is where volatilitycan hurt.

|

If a 4 percent withdrawal meets your needs today, what happenstomorrow when the market drops 20 percent? Selling into a fallingmarket to pay anticipated retirement expenses is never a goodthing.

|

|

Prior to retirement, you could ride out market swings by holdingonto stocks when prices are depressed. By taking that 4 percentwithdrawal, you negate the chance to recapture your lost wealthduring the usual bounce back.

|

Selling means losing that lost wealth forever.

|

Here’s how to avoid this peril.

|

By the time your retirement lies within five years, you have afairly confident idea what your expense needs will be in thefirst two to three years of retirement.

|

So, for those last five years before you retire, start buildingup your cash reserves with the goal of having those two tothree years’ worth of retirement spending saved in cash by the timeyou retire.

|

This way, if the market goes down, you know you’ve got the cashto pay for those expenses you’ve long dreamed of affording. Betteryet, you can continue to replenish those cash reserves when themarket is rising.

|

Why is it important to save two to three years’ worth ofexpenses? That’s the time it usually takes for the market to fullyrecover from a correction. This allows retirees to continue tofully fund their retirement as anticipated without worrying aboutmarket gyrations.

|

There you have it. Post-retirement asset allocation madeincredibly simple.

|

This goal-oriented target of “organic” portfolio theory may bewhat finally replaces “modern” (remember, it’s so old itpractically predates Elvis) portfolio theory.

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Christopher Carosa

Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).