Ginny and Seth, each two years from retirement, became worried about their finances as the first six months of the Trump administration unfolded. “Should we be concerned about our portfolio?” Ginny asked. “Stocks have been going up,” Seth said, “but is that a mirage?” Ginny asked additional questions about Medicare, the value of their home, their pensions and their tax positions.
“Slow down,” I answered. “Sound financial decisions don’t involve who’s in the White House, although that can impact you for sure. What you always need is a good long-term strategy.” I offered them 10 guidelines to help secure their finances now and through presidencies to come:
1. Never make investment or personal finance decisions based on your politics. Your financial plan should drive decisions based on your needs, objectives, risk tolerance and financial values. Very important: Avoid market timing. Long term, it just doesn’t work.
2. Keep enough cash available to meet your needs for at least two years. There’s good news here. The Federal Reserve has raised the federal funds rate. This gives investors an opportunity to receive marginally higher returns on their FDIC insured savings. Look at online savings options that are FDIC insured.
3. Take what markets give you. Don’t expect higher returns than what the markets provide — or promises from charlatans who can’t keep them. Bonds, stocks, commodities and real estate can be volatile. Not every year offers a big win. To offset this reality, make sure your portfolio comes with low costs. Over time, passive index investing repeatedly outperforms actively managed stock portfolios — and with fees substantially lower. If portfolio returns don’t generate enough income, see rule 7.
4. Diversify your portfolio. For best results — and sound sleeping — combine different asset classes. These gain or lose value at different times based on changing economic factors. A diversified portfolio will hold some assets on the rise and others going down. All these assets can shift direction in a hurry. You can live with losses offset by gains that produce a long-term increase in the value of a well-planned portfolio. And when prices in an asset class decline, that’s the time to buy! Each of these are examples of separate asset classes: stocks, bonds, real estate, commodities.
5. Plan on how you’ll fund a lump-sum purchase — wedding, big trip, new car — and how you’ll generate regular income. Early in retirement, you may want to treat yourself. Fine. But you’ll need a sufficient and steady cash flow to replace your earned income. Don’t be anxious. Take control.
6. Know how much you spend now and estimate different spending in retirement. Retirement can change your spending pattern. It’s best to be prepared to reduce your lifestyle somewhat. On the other hand, you may find yourself eliminating some expenses or willingly changing your lifestyle. This may result in more spendable income than you thought you’d have. As to tracking spending, many sound online tools exist. If you prefer spreadsheets or pencil and paper, that’s fine.
7. Assess your willingness and ability to control your spending. Retirement spending isn’t linear. Early on, you might plan on spending more than is sustainable over time because you’re healthy and want to travel, take classes, re-start old hobbies or try new ones. If you’re confident you can control your spending later — if necessary — you can do more in the early years then start cutting back. The challenge: Be honest with yourself and operate within the next guideline.
8. Review your retirement income and spending each year. Take nothing for granted. Make sure you’re in the ballpark and keep up with such variables as market return and life expectancy. We use what’s called a Monte Carlo analysis to help clients establish safeguards as they track spending.
9. If you’re married or have a life partner, have an estate plan. This is critical to sustaining the financial well being of each partner/spouse after the death of the first.
After telling all this to Ginny and Seth, I paused. A bit of puzzlement appeared on Ginny’s face. “So, what’s guideline No. 10?” she asked. “Simple,” I said. “Keep following 1 through 9.”