The start of the year is a perfect time to reassess your portfolio and ensure you’re on track for the retirement you want. Here’s how to do it right.
Volatile markets can be particularly unsettling for those who are closest to retirement. But is it possible to plan for a better retirement even in volatile markets.
After eight years of markets seeming to do nothing but rise, "seeing the Dow down 600 to 800 points in a single day [as it has been recently] is a new feeling," says Seth Dubrow, a J.P. Morgan wealth strategist based in New York. "People planning to retire in the near term are concerned that their investments may not sustain them after their working years are over."
Even if that describes you, Dubrow says, planning a better retirement strategy is possible. His advice: Seize the opportunity. The start of 2019 is a good time to review wealth earmarked for retirement. Refresh and refocus, as needed. After the long bull market, says Dubrow, portfolios that might have been well-balanced previously may now be overweight in stocks and may require reallocation toward lower-risk investments.
Rethinking your investing strategy is good not only for those targeting a better retirement even in volatile markets, says Philipp Hecker, Head of Wealth Planning and Advice for J.P. Morgan; it's also smart for anyone who hopes to retire eventually. "Typically the beginning of a year is a great catalyst for investors to re-establish their goals for their lives at large," he says. "They tend to go to the gym and pursue fitness goals. Why not commit to something that arguably will have just as important a long-term impact?"
Planning for a better retirement strategy
So where to start? J.P. Morgan has a 10-point guide that breaks down into three parts: Picture your future, rally your resources, and optimize for success.
Picture your future
Our experts say this first part is particularly crucial. Take the time to really imagine your retirement, and ask the big questions. How much will you really need to retire? What sort of lifestyle do you want to maintain—and how do you expect it to change as you age? How much might you want to leave to children? Do you want to create a charitable legacy, perhaps by giving to a school or another particular cause? And, while doing this, don’t be overly optimistic; build in a margin of safety.
Many people think that in retirement they will spend less than they do while working, but this premise is often incorrect, says Dubrow. So be honest with yourself.
Also, Dubrow points out that wealthy people, who have the funds to retire earlier than others and before Medicare kicks in, need to be especially cognizant of expenses such as healthcare, which can run $40,000 annually just for insurance premiums for a family of four. Even after Medicare is available, healthcare for a couple costs more than most think.
It is also important that you plan for a long retirement, Hecker points out, noting that statistics indicate better-educated individuals with higher incomes and healthier lifestyle choices tend to live longer. There is a 50% chance that one member of a couple over 65 will live to 90, and a 20% chance one will make it to 95. “Many of us underestimate the lives we will enjoy,” he says.
If life expectancy continues to increase—and everything we know about science suggests that it will—you’ll need to plan and invest for a life even longer than the one predicted by today’s actuarial tables. You may be looking at 30+ years in retirement. Staying financially comfortable will therefore require dedicating an appropriate portion of your portfolio to growth, to increase the likelihood your investments will maintain purchasing power.
In addition, don’t forget to include others in your plans; speak with your spouse. “It’s important for couples to each articulate their priorities for retirement so they can get to a shared vision,” says Hecker.
Rally your resources
Once your dreams and team are in order, the next part is to execute, which can be fiendishly difficult to do. The rules are simple: Save and invest consistently from the start. Diversify investments to minimize risk. Also, be sure to maximize Social Security benefits, both yours and your spouse’s.
Most wealthy people can afford to wait to begin receiving Social Security payments. If you do wait until after you hit your “full retirement age” (around 66 years old), your benefits will permanently increase by 8% every year, until you hit age 70.
Being able to wait to take Social Security doesn’t mean people always want to, or even should. One of our clients chose the permanent haircut of starting Social Security at 62, the earliest possible age, because she wanted to use the money to help her daughter, a new mother, pay for a nanny.
Other aspects of retirement planning are less obvious, but just as important. Take the use of credit, for example. As it can be much harder to borrow when in retirement, we recommend that clients consider arranging for a line of credit while they are still working. That way, they can use credit strategically—as an alternative source of short-term funding for a home remodel, for example, or unexpected healthcare expenses when selling investments would be less advantageous, such as during a recession.
We also recommend bridging the occasional income gaps with loans instead of asset sales that may create unnecessary capital gains tax liabilities. Speak to your tax advisor about how to structure your loans to maximize interest deductibility.
Optimize for success
Now is a good time to reassess how volatility may affect different parts of your balance sheet, says Thomas Jarecki, a J.P. Morgan wealth strategist based in Chicago. One way to think about it, says Jarecki, is to put your wealth into buckets that each serve specific purposes.
- Liquidity—Determine how much money you need as a safety net. These are held in low risk accounts such as bank deposit accounts, CDs and money markets.
- Lifestyle—Assess how much you’ll need to set aside now to fund your lifestyle expenses now, and later in retirement. Consider allocating these assets in conservatively diversified portfolios.
- Growth and wealth preservation—Any remaining assets may be invested more aggressively and go toward funding longer-term goals such as transferring wealth to family and charitable organizations important to you.
In other words, says Dubrow, exercise control where you can. When it comes to retirement, information and good planning help create peace of mind. Speak with a J.P. Morgan advisor about how you can build a better retirement.