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7 Rules for Making Retirement Investment Decisions

7 Rules for Making Retirement Investment Decisions

When it comes to retirement savings, many people feel overwhelmed. They know they want to live the good life in their golden years, and know they should save as much money as possible, but beyond that, many are just clueless. They need some guidelines, a place to begin.

Here are seven rules for making retirement decisions that can be a starting point for your retirement planning.

1. Start with a comprehensive financial plan

Identify your mission, vision, values and goals. “How do you know if you are investing the way you should? Through the development of a plan your goals will become clear. Investment strategies should support and compliment what it is that is important for you and your family,” says Leonard Wright, wealth advisor, Northwestern Mutual Wealth Management Company.

Make sure though, that your planning includes the possibility of spending some number of years in a nursing home. “This will help you be prepared, and also help you assess if you should buy insurance or simply pay the cost of long term care from income and assets. Keep in mind whether there might be an inheritance that could be set aside to pay for nursing home care, or if you would downsize your home during your later years to come up with money for long term care,” says John Hauserman, author, RetirementQuest: Make Better Decisions.

What resources, such as Social Security and pensions will you have? Say you think you'll need income of about $80,000. “Let's say you have a pension of $20,000 and projected Social Security at the age you want to retire that both have cost-of-living adjustments. You would then need to solve for $40,000 worth of income from your retirement investments. If you don't have a cost-of-living adjustment the calculation is a bit harder because you have to make up for the lack of increase from your retirement investments,” says James Brewer, a financial advisor with Envision 401k Architects.

Figure out how much you will need in investments in retirement to supplement other sources of retirement income. You need to know how much to invest each year and what investment return you will need on those investments from now until retirement, as well as during retirement. “Without knowing where you need to be, it is impossible to know how to get there,” says Jim Oliver, a CPA with Jim Oliver & Associates.

2. Know your core financial priorities

What is the primary focus of your money – growth, income, liquidity or preservation? Rank these priorities in order of importance where number one is your top financial priority and four is the lowest. While all these are important, one is always more important. For most people in retirement, making sure they have enough income to last their lifetime is usually number one. “Once you know your priorities, make your overall financial decisions based on your priorities only,” says Steve Lewit, CEO of Wealth Financial Group.

3. Understand your asset allocation between risk and safe money

Diversity is key. Research shows that asset allocation explains 91% of the growth of a portfolio (market timing, picking the right stocks, etc. is the balance of 9%), says Lewit. The first step in asset allocation is to determine the amount of your assets you want at risk to market forces, and the amount you want guaranteed and the amount you cannot lose, he says.

Set your mix of stocks, bonds, and short-term investments based on your time horizon. To determine the percentage of your portfolio to hold in stocks, a good rule of thumb is to subtract your age from 110, then multiply the result by 1.25 says Stuart Ritter, a senior financial planner with T. Rowe Price. In other words, your asset allocation should match your goals, says Ritter. Shift from stocks to bonds and cash as your time horizon shortens, rebalancing your portfolio's asset allocation and diversification to your new target at least once a year, he says.

Be clear about your risk tolerance. “If you take more risk than you can tolerate to get investment returns, you will likely not stay invested consistently for the long term. Getting off the highway to your destination frequently will slow the time it takes to get there,” says Oliver.

4. Remove emotions from the equation

Take emotions out of decisions by always referring back to real data, or using an investment philosophy that is not based on market timing or picking winners. Research shows that these tactics never work over a sustained period of time anyway, says Lewit. While your investing plan is not etched in stone, do not veer from it frivolously.

5. Keep taxes in mind

Match the right investments to the right investment accounts. Investment types with advantageous tax treatment, such as small cap growth, should be in taxable accounts to take advantage of lower capital grains and the ability to choose when to pay taxes on those gains, points out Oliver. Investments with higher immediate taxability, like high yield corporate bonds, should be in qualified retirement and IRA accounts to postpone the taxes until withdrawal, while Roth accounts are the place where investments have a potential immediate tax bite, but also a potential for substantial increase in value due to inflation, such as treasury inflation protected securities (TIPS), commodities or real estate for example, explains Oliver. “Smart tax placement of investments can increase your overall return.”

6. Is the decision based on the past or the future?

Very few investments that were top performers last year will repeat as such in the coming years, says Jason Laux, vice president of Synergy Financial Services. “Be cautious that retirement investment decisions are not solely based on past performance. Do not let choices made in the past cloud your future vision. A bad or good experience with a past investment can be overweighted when making a current decision. New markets require new thinking and sometimes that means revisiting an older failed option or disregarding a past success that would no longer be appropriate,” he says.

7. Control investment expenses

Avoid high cost annuity products, mutual funds or investment managers. Be clear on all costs and fees associated with the investment. “These costs are a drag on profits, particularly over decades,” says Tiffany Washington of Washington Accounting Services.

Ask yourself whether you can afford the investment. Whether the investment is a vacation home, classic car or a market-based investment that carries principal risk, understand what the decrease in liquid capital or potential market loss may do to your future ability to live comfortably, says Laux.

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lottadat   |     |   Comment #1
That formula gives FAR too risky a stock allocation for a retiree. At age 65 it would have you put 56% of your assets in stock. Consider the source of that suggestion--a flack from a mutual fund company who profits when you buy stock--and say no thanks. Many retirees can't afford to go through another 50% drawdown.

These are the same "experts" who tell us that we are throwing our money away if we invest in CDs. Ask me how I felt about my CDs in 2002 and 2009.  
outtempster   |     |   Comment #2
Agree with lottadat. Security should be the 1st priority when you are at age of 65, don't believe in those "financial experts" who ask you to put even 40% of your total investment in stocks. Even if the index is averaging going up, your stock or stock fund may not be dong as well. Only invest the money you can afford to loose in stock for possibility of better gain. Same example, if you need $80,000 a year, if you actually have $90,000 income total, all or part of that extra $10,000 can be invested in stocks if you want.
Anonymous   |     |   Comment #3
Security should be the #1 priority for those over 65 is RIGHT!

Another thing to keep in mind about the stock market is that even if the market is climbing and the economic future LOOKS bright, IF one intentional or even an errant missile strike from some radical country should become a reality, the stock market will take a nose dive straight down and may take years to recover again.  And those of us who are retired, we do not have all that many years left to wait for another recovery.  It's a gamble I can not afford to take.   
Wanderer   |     |   Comment #4
It seems to me that no one should be planning on using bank deposits as a retirement fund without first considering what is happening in Cyprus, where the mandarins at the ECB have decreed that, in spite of supposed government insurance on the first 100,000 Euros worth of a deposit, insured depositors will suffer a 6.7% tax on their deposits. Could it happen in America? If one of the too-big-to-fail banks were in danger of failing, again, maybe from the kind of multi-billion dollar "London whale" derivatives bet lost recently by JP Morgan Chase, would it really be possible to honor the American bank insurance scheme? A safe retirement fund means not putting all of ones eggs in one basket. Making a significant allocation of one's funds to physical precious metals, stored outside the banking system, is a wise move, in light of what is happening in Cyprus, and what may well happen here in a few years...
Anonymous   |     |   Comment #5
Why would a retired person put IRA money in the market when they would pay full income tax on it when withdrawn.  If you have extra money and want to invest put it in the market outside of IRA money where gains would be taxed lower and losses could be deducted. Put your IRA money in CD's where it will be taxed as regular income either way unless it is a Roth. If you want to play in the market with IRA money and have enough to play with it use part of Roth money only, but you would not get the tax advantages but neither would you pay your top income tax rate on the withdrawals. 
ytytytyt   |     |   Comment #6


Dear Wanderer,

Indeed ... I too wondered about this:


Yours Truly,
- Anonymous

ytyt   |     |   Comment #7


Dear Ms Nance-Nash,

As usual the cherry picking involved in writing of your articles as to who says what has resulted in a contradiction!  :-)

>> Diversity is key. Research shows that asset allocation explains 91% of the growth
>> of a portfolio (market timing, picking the right stocks, etc. is the balance of 9%), says Lewit.

Okay ... so looks like per "research" 9% of growth is explained by "market timing" ... Right!

>> Take emotions out of decisions by always referring back to real data, or using
>> an investment philosophy that is not based on market timing or picking winners.
>> Research shows that these tactics never work over a sustained period of time anyway,
>> says Lewit.

Whoa whoa whoa .... Did the "research" not show that 9% of portfolio growth is explained by "market timing"? 

If words "never work" are used, especially in association with a "research", then the growth attributable to market timing better be 0%.  Anything higher than 0% will mean that these tactics "sometimes / often-times / many-times / several-times" work, rather than "never" work .... No?

Yours Truly,
Wanderer   |     |   Comment #8
Dear ytytyt,

More of America's store of wealth is "saved" in the form of stocks and bonds than in the form of bank accounts. Accordingly, if the US government, in its infinite lack of wisdom, decided to institute a wealth tax, it would be certain to target investors in brokerage accounts. The safest course of action, therefore, as it seems to me, is to allocate a portion of your wealth to precious metals, and to store these, not only outside the banking system, but outside the country. Preferable, one would do this in a "safer" country, that has a lot less financial fraud, and will have the commodities to sell in a heavy inflationary world.

Canada comes to mind. Remember, in spite of having very close ties to the US government, Canada once provided a haven for young Americans against the Vietnam War. It was the right thing to do then, and they did it, against heavy pressure from the US government. Canada is likely to provide a haven for Americans suffering under unjust confiscation laws, someday, if and when the USA enters a period of chaos springing out of Federal Reserve insolvency (for one example).

So, for a safe retirement, given the terrible conditions in the world today, it seems wise to put some wealth into Canada.
Anonymous   |     |   Comment #9
I recommend that you keep part of your portfolio in a low risk investment to provide you with a core investment that will shield you from the horrific events that have depleated a larg number of investors funds.  The advisors can supply an investment strategy but you should not accept it on blind faith.  You should spend enough time with the advisor reviewing his investment position so the you understand the basis upon which they have made their recommendation.  The statement "Buyer Beware" is a reality in investing that we sometime forget to do our homework and go blindly into our financial  future.


Thomas   |     |   Comment #10
It’s perhaps better to leave it in the hands of a pro. Don’t really want to wake up on my 60th birthday to realize that I’m broke because of rise in inflation or crazy volatility in the stock market http://goo.gl/SSe5nN. By the way, great post.