Retirement is 10 years away
Even with a decade to ride out the market ebbs and flows, this is the time to reexamine your portfolio. If recent market gyrations felt too stressful, perhaps it’s time to speak with your advisor about your tolerance for risk, what outcomes you might expect, and whether your asset allocation is appropriate considering your overall financial plan.
Resist the urge to make rash decisions—such as exiting the stock market—based on last year’s volatility or what you’re hearing through the media. History shows that people have a penchant for stepping out of the market at the wrong times and then waiting far too long to get back in, often selling low and then getting left behind in the next bull market. Ten years is generally equivalent to a full market cycle.
“Markets move very quickly, and if you’re not invested, you can miss the opportunity,” says John Canally, Managing Director, Chief Portfolio Strategist, Investment Management Group at TIAA.
Retirement is five years away
Many people wait too long to plan where they will generate income once paychecks from work stop. The time to figure out your post-work income sources is not the day you retire. Talk to your financial advisor early about a preliminary retirement income plan and how to diversify your potential sources of retirement income. There are also tax strategies to consider, and you may want to rearrange your assets prior to retiring. Make sure you’re taking advantage of all tax-deferred accounts and catch-up contributions to your employer plan and IRA, if eligible. Consider adding a fixed annuity, which can provide payments for as long as you live. You can use this to save for retirement as well.
It may be time to hand the reins of your asset allocation to a professional portfolio manager trained to think holistically about how to capture income opportunities and risks.
Retirement is one year away
You’re on the cusp of stepping away from full-time work, and it’s time to revisit your retirement income plan and shore up what kind of investment portfolio can help replace your monthly wages.
While every situation is unique, TIAA’s rule of thumb is to start by dividing your income sources into roughly one-third from annuity payments, one-third from Social Security and any pension payments, and the rest from withdrawals from investments and savings. Thinking about it another way: two-thirds from sources of guaranteed income, one-third from savings that is more exposed to market volatility. This ratio helps mitigate the possibility of a market downturn significantly eroding your assets earmarked for future income. Annuity payments early in retirement can help gird against market volatility and set you up to avoid drawing Social Security before age 70. Every year you can delay drawing benefits after age 62 is a guaranteed 8% increase in benefits; you won’t find that kind of return in the markets.
Speaking of markets, annuity payments can help in the early years of retirement, too. Says Canally: “The beauty of allocating to a fixed annuity is that it can help dampen the effect of markets falling in the years approaching retirement. This can have the effect of extending how long you receive retirement income, and potentially the size of the nest egg you leave to your beneficiaries.”
