Retirees and pre-retirees alike will look to the income they make on investments to help carry them beyond their working days. Any turns in the stock market can hurt their plans for the future.
The word “comfort” can have many different meanings depending on a person’s age, whether it is being comfortable as a teen planning your future, having a comfortable life as an adult or making a comfortable life in retirement. A recent study shows more than a quarter of all Americans are uncertain when it comes to being in that last group.
The study, conducted by the Employee Benefit Research Institute, found having a “comfortable” retirement is something many people in this country believe will elude them. However, there are certain steps that can be taken to make the dream a reality.
Haitham “Hutch” Ashoo, the co-founder of Pillar Wealth Management said in a statement that one of the most important things for potential retirees to do is determine what “comfortable,” means to them, “to ensure you have what you desire most in retirement.”
Pillar co-founder Chris Snyder said retirees and pre-retirees alike will look to the income they make on investments to help carry them beyond their working days and any turns in the stock market can hurt their view and plans for the future.
Snyder said based on previous performance financial advisors look at an average of a 5% drop in the market 3 times a year.
“Advisors should be planning for that,” he said. “We tell our clients, ‘Don’t focus so much on the drop—we’ve planned and accounted for these predictable recurring negative events. Instead, we should evaluate whether it will prevent you from reaching your life goals.’”
The wealth management advisors provide these 4 tips to help people make their future more comfortable in many ways.
1. Have a deep understanding of your retirement goals
Without goals, they say, it is harder to plan for the future if you do not know what you are looking for.
“Think about what kind of cars you wish to drive; whether you’d like one or more vacation homes; where in the world you’d like to play golf; whether you want to budget $10,000 a year for travel or $250,000,” said Ashoo.
He also suggests keeping items like beneficiaries and charitable causes in mind when making a plan for retirement.
As part of that planning, the AARP suggests future retirees start investing early. Investing just $500 on a stock that goes up 6% will be worth $530 after a year.
“If you choose your investments well and keep track of how they’re doing, this pattern can continue as long as you do not sell them.”
2. Have a reliable process for evaluating your progress toward your life goals
Snyder said investors need to know whether a “drop,” or a “correction,” in the market will allow them to meet their goals. Looking at performance alone is not enough, he said.
“We create a wealth management analysis that stress tests their retirement life goals through a simulation of stock, bond and cash activity from 1925 through 2013,” he said.
AARP suggests one way to reduce an investor’s risk is to diversify his or her portfolio by looking at mutual funds or index funds. An investor’s money should be spread out among stocks, bonds, and cash equivalents such as a money market fund. Doing so increases the chance that some investments will do well in case the market falls.
According to James M. Dahle, MD, investors who are just starting out will see the most benefit from adding additional asset classes to help diversify their portfolios. Eventually, the benefit of adding more classes goes down with each one that is introduced. He recommends staying between 3 asset classes (a bare minimum) and 10 (after which there is little added benefit).
3. Avoid destructive behavior
With uncertainty in the market Snyder said a person’s instincts in how to react to the volatility could do more harm than good.
“Even the smartest, biggest institutional investors make the mistake of allowing their emotions to guide their judgment,” he said. “When the stock market goes up, people’s enthusiasm goes up and they rush to buy, which increases their risk. Then a correction occurs and they find themselves overweight in equities and they wonder what happened.”
Another problem is that people have trouble knowing when to sell or they become emotionally attached to their stocks. Michael Ervolini of Cabot examined 500 professional fund managers and found out that they keep “winners” too long. Retail investors tend to hold on to their losers too long in the hopes they will one day come good.
Snyder said if investors have done a risk analysis that shows their current plan will get them where they want to be in the future adding additional liabilities can be a detriment to keeping the plan from reaching fruition. AARP has a similar message in keeping investments simple.
“Investing doesn’t have to be complicated,” they say. “Owning a few simple, well-chosen investments is a sound approach.”
By looking at the long term, AARP says investors can do more good than focusing on now.
“With uncertainty in the markets, it’s natural to be anxious and confused. But using your emotions as a basis for financial decisions is a losing game.”
4. Let your financial professionals do the work
With all the steps in place Ashoo said investors need to trust the professionals to handle their money according to the plan they put together.
“We’re paid to provide our clients with peace of mind, and to allow them to enjoy everything that is near and dear to their hearts,” he said. “Life’s too short to waste time and sleep worrying every time something happens in the world that could affect your investments.”
This means investors need to do their due diligence when selecting their financial professionals. Know what red flags to look for, and come prepared with a list of questions when working with someone new. Be sure you know who is handling your money.
AARP suggests some tools that could prove beneficial for investors including an interactive asset allocation calculator, and an online investing course sponsored by the National Urban League and the Investment Company Institute Education Foundation.