"You are never too old to set a new goal or dream a new dream" - C.S. Lewis
Over the last couple of years, there had been a focus on the nearest-retirees - those literally on the cusp of leaving the workplace. How would those poor souls do it? Decimated portfolios littered the financial landscape and the hopes and dreams of those closest to retirement were endlessly profiled as being the norm. It was these reports that suggested that most workers in their sixties now were faced with a daunting decision as to whether to keep working beyond what they considered their best guess and reasonable assumption about retirement. Perhaps the catching headline "73 is the new 65" caught your eye.
We wondered if this was us someday, looking at a long retirement and no time to give compounding the opportunity to work. The decisions facing this group was far from anything they had assumed they would make. They had no confidence that the stock market would recover enough to get them back to where they thought they should be. They knew that capital preservation was important at their age. But what if the capital they should have been preserving wasn't going to be enough?
So as most people do when watching another's worst nightmare unfold in front of us, we moved what we had into more conservative holdings. Where we once scoffed at target date funds as the purview for the undereducated investor, the set-it-and-forget-it option of the new hire who was often defaulted into this type of fund, we now saw potential. The concept of simply picking a retirement year was playing to our fears: all we had to do was invest and they would adjust the portfolio to keep it safe.
Target date funds are, for those who may not know, a type of fund, often found in your 401(k), that readjusts its portfolio as you age, shifting from stocks to bonds gradually over the course of your work career. The concept is sound and all of these funds come with a target year. But the illusion in the soundness of the concept, that a fund can do this without much input from you, is much different than the reality of the situation. Can the re-allocation of a portfolio, attempted by a fund that has never done this before, be done without creating some questions?
While they have never reached their target date, the plan they have sold you may not be as seamless as they suggested. Suppose you were retiring in ten-years, how much of an allocation of stocks to bonds would you consider reasonable? Is the fund manager, who has also never done this before correct in assuming that ten years away, a good stock to bond ratio is 60-40? Or perhaps your fund manager thinks otherwise preferring less stocks and more bonds? Or vice versa? Or who knows? Couldn't you be doing just as well in a balanced fund (one that always has a fixed amount in stocks, often 60% with the remainder in bonds)?
Here's what we know and what you have to guess on and assume. Returns are not the be-all-to-end-all answer to getting your portfolio to where it needs to be at retirement. The risk of trying to increase your exposure to stocks to boost your account balance will only work if you will have successfully avoided another bear market. Considering their frequency, which seems to be picking up speed as we get older, you can expect a fall-out about every ten years.
So having too much in stocks (a recent Fidelity survey found that 13% of their plan participants who were considered close to retirement had allocated 100% of their portfolios to make up for lost balances suffered just a couple of years ago) relies on not only a consistent stock market recovery but a trouble-free investment horizon lasting a decade or longer.
Having an all bond portfolio, as 15% of those near-retirees with Fidelity have, seems less risky. But if interest rates should rise -and they will - these safer-than-stocks investments will suffer a blow that most aren't expecting from such a conservative approach.
So if too much in stocks has risk and too much in bonds has risk and target date funds aren't all created (or invested) equally, what does someone just ten-years away from retirement do?
1. Understand who you are and what you know. If you are the sort of person comfortable with making some adjustments in your plan - be it lowering your retirement expectations or increasing your contributions to the plan and making the financial sacrifice now or both - life after work depends on how long you want to work. For the vast majority, working after sixty-five is simply not an option. You may be physically unable to do so or mentally not as willing to do so. Either way, talking about working longer may not be worth considering.
Lowering your retirement income expectations is perhaps the hardest of the two to do. You have probably made the assumption that most financial pros make: a 4% withdrawal of your portfolio each year, while making no guarantees, suggests you will not run-out of money in retirement. But retirement is two things: being able to enjoy it while you are healthy and preserving money to assure you don't die broke.
That 4% number may turn out to be a bit of a reach. There have been suggestions that running out of money shouldn't be the only consideration. An adjusted disbursement schedule, one that gives you a slightly higher withdrawal in the first years of retirement, is reflective of what retirees need (say start with 6% in the first 10-years of retirement adjusting down to 3% thereafter). Studies have shown that most retirees tend to want to spend more in the beginning years and less as they age.
2. Increase your contribution. In an atmosphere of fewer matching plans than just 3-years ago and the slowly recovering state of the employer match, increasing your contribution is likely to be the only option you have. This creates an unwanted austerity you may not be comfortable with embracing. Saving more means less to spend which means you have to keep a closer eye on your debt levels. Carrying unwanted debt into retirement is the greatest strain on any accumulated assets you may have.
3. Decrease your exposure to your company's stock. This may be easier to suggest than it is in practice. Some companies only match your contribution if you buy this security. This company-first thinking is often more risky than a 100% stock allocation. Research has uncovered an alarming 6% of those in 401(k)s have almost 80% of their investments tied to the company where they work.
If you think you can work longer, and want to do so, then that will help immensely with getting your portfolio better funded. But the funding of that portfolio needs to increase whether or not that is your decision. You are still not putting enough away. You are still carrying more debt burden than you should, which acts negatively on how much you can save. And many of you are rewarding yourself too soon.
