Midyear tweaks to your retirement plan
Six months into 2013 and much seems
different from the start of the year. Gold is down, oil’s up, jobs are up, and
the Fed is signaling that it might taper us off the free money drip.
If you’re in retirement or five to 10 years away,
now—especially since your quarterly statements are arriving—would be a good time
to give your portfolio a once-over to see what if any changes might be order.
Here’s what experts said you might do.
Create or review your
plan
If you’re not working with an adviser, maybe it’s time
that you do, said Rita Cheng, a financial adviser with Ameriprise Financial
Services. In the best of cases, she said, an adviser could help you create
comprehensive financial planning that takes a holistic view of your assets and
not just asset allocation, but asset location.
Chuck Jaffe: Your American Dream
As the nation celebrates its birthday and the people
live out a slice of the proverbial American dream — a good life, spent enjoying
prosperity with friends and family — it’s a good time to see just how and why
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If you already have a plan or if you are already working
with an adviser, now would be a good time to revisit your plan and focus in on
essential expenses and lifestyle expenses. “The rationale here is that in
working with clients, I try to have to fixed or essential expenses covered by
fixed or guaranteed sources of income,” said Cheng.
In her world, Cheng said, once she determines the amount
a person needs in retirement, then she goes “back to the drawing board and
determine the most appropriate asset allocation for their investments.”
Cheng also said it might make sense for retirees and
pre-retirees to consolidate their retirement accounts and work with their
adviser to create a retirement-income or bucket strategy.
And, Cheng recommends addressing long-term care
insurance needs as part of this midyear review. “The cost of long-term care and
health-care expense may cause (retirees) to deplete their retirement assets at a
much faster rate,” she said. “A specific portfolio can be dedicated to address
this issue or income from the portfolio can be directed to offset the cost of
premium.”
By the way, if you don’t have an adviser or a plan, you
might consider using websites such as Betterment.com, Wealthfront.com, or
PersonalCapital.com to get started. Others looking for an adviser might consider
such websites as FPANet.org and Napfa.org, among others.
Review your tolerance for
risk
Now that the markets have reclaimed the peak last hit in
2007, James Daniel, financial adviser with The Advisory Firm, recommends that
retirees and pre-retirees consider their tolerance for risk and decide on how
much equity vs. bond exposure is right for them. “Those already in retirement,
or very close, who have ridden this market through the two roller coaster cycles
over the past 13 years, may want to lock in some gains in both equity and bond
allocations, and reallocate your portfolio into something that could handle the
volatility better,” Daniel said.
Do nothing
Now it’s possible that once you review your
investment/retirement policy statement, your risk tolerance and your asset
allocation, you might need to make any changes. “An investor with a portfolio
allocated according to a sound financial plan may not need to make any
adjustments midyear,” said David Zuckerman, a principal and chief investment
officer with Zuckerman Capital Management.
Don’t let emotions overrule
your plan
Now that might be harder to do than it sounds,
especially if your bond portfolio is down but still within the guardrails of
your plan. “A lot of people will be tempted to move money out of bonds after the
recent surge in interest
rates, but if a comprehensive financial plan calls for a fixed-income
allocation then selling just because rates are rising is not advisable,” said
Zuckerman.
The reality, he said, is that the bond market isn’t
likely to experience a continued surge in interest rates of the magnitude that
was seen in May and June. “Well-diversified fixed-income portfolios that limit
duration and hedge interest-rate risk should generate positive, if
unspectacular, returns in this environment,” said Zuckerman.
Cheng said investors ought not to forget that there’s an
inverse relationship between bond prices and interest rates. As interest rates
rise, bond prices will decline. “This is significant because the bonds that were
purchased, likely at a premium, will decline in value and at the same time their
coupon payment will remain the same,” she said.
Cheng also noted that investors might want to consider
what she described as dedication strategies, such as “Immunized time-horizon and
cash-flow matching strategies for their bond portfolio. “Dedication strategies
are specialized fixed-income strategies that are designed to accommodate
specific funding needs of the investor,” Cheng said. “The portfolio that has the
least reinvestment risk will have the least immunization risk. A strategy with
an interest-immunization component is designed to help mitigate risks associated
with interest-rate changes.”
FYI: Reinvestment risk is the risk that interest income
or principal repayments will have to be reinvested at lower rates in a declining
rate environment, according to Investinginbonds.com.
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