Top 5 Financial Moves in Retirement

We recently published posts on the top five financial moves that you can make in your 20s and 30s and your 40s and 50s, but what about at the end of the career spectrum? How can you best pursue financial success and satisfaction once you are already in retirement?

#1 Find the Right Investment Balance.  There are many rules of thumb on how to allocate investments in your portfolio as you age.  A balanced portfolio is often defined as 60% equities and 40% bonds.  Some would advise that your equity holdings should decrease as you age, with the equity portion of your portfolio approximately equal to 100 minus your age.  For example, at age 60, your equity holdings should be 40% (100 — 60 = 40) of your portfolio.  However, especially in this low interest rate environment, such “conservative” portfolios may not be advisable.  While they decrease market risk (the amount that the value of your investments will fluctuate in the short-term), they increase purchasing power risk (the chance that your investments may not keep pace with inflation over the long-term).  We advise looking at your projected withdrawals for the coming years, and let that, in addition to your risk tolerance, guide how much you need to hold in bonds and cash, rather than a generic rule of thumb.

#2 Don’t Pay Attention to Financial News.  When we meet with clients, it is clear within 5 minutes which ones watch a fair amount of news during their day.  On entering retirement, some clients fill a portion of their increased leisure time with watching the news.  While it is certainly valuable to remain well-informed, watching commentary on financial events tends to increase investor anxiety in a counterproductive way.  Take, for instance, tracking the movement of the stock market.  As DFA Vice President Scott Bosworth recently explained, if clients check the market every day, they will be disappointed 45% of the time (based on returns over the past 42 years) because the market will have declined that day.  However, if clients only check the market quarterly or annually, they will be disappointed much less often–approximately 39% and 14% of the time, respectively.  The lesson is that we need to be patient and not lose faith in the market over short-lived crises–behaviors that the 24-hour financial news cycle is not likely to reinforce.  In fact, it makes them even more difficult.

#3 Explore Options Before Claiming Social Security.  Many retirees look forward to reaching their full retirement age and collecting their Social Security benefits, accrued over years of hard work.  However, maximizing Social Security benefits over your lifetime often entails suspending your benefits until a later age (up to age 70), collecting spousal or survivor benefits, or some combination thereof.  We discussed this issue in more detail in “5 Factors to Consider in Determining When to Start Social Security Benefits.”  Be sure to make an informed decision.

#4 Consider Carefully Your Options for Living Situations.  A decreasing number of retirees seem to be remaining in the same home from retirement until the end of their lives compared with earlier generations.  Some move to areas with a lower cost of living, a better climate, or close proximity to their adult children, while others move into independent living facilities, by choice or necessity.  This is a complex issue, which we have discussed in “4 Factors to Consider before Moving in Retirement.”  Consider carefully and proactively all of your options before choosing to make a big move, or being forced to move hastily due to medical or other issues.

#5 Be Flexible with Spending during Downturns.  Many investors also use general rules of thumb to gauge whether they have adequate funds on which to retire.  For instance, they may continue working until their nest egg is 16 times their final salary, or until they could live on withdrawals amounting to 4% of their portfolio at retirement.  However, these rules of thumb do not guarantee financial stability throughout retirement, and significant market declines in the early years of your retirement may jeopardize this strategy.  While we do not want clients to overreact to changes in the market during retirement (see #2), it may be necessary to adjust spending during major market downturns, especially if they occur soon after retiring (and beginning to draw on your portfolio).  Clients should then evaluate whether certain discretionary expenses (e.g. major vacations, new cars, home furnishings, gifts to family members) could be postponed until after the market has recovered to avoid having to sell investments when their value is relatively low.

As always, we are here to help clients navigate these decisions every step along the way!