What Happens to Your Time Horizon at Retirement?
By Laurie Haelen
Throughout your working years, you continue to save while your actual time horizon — the amount of time you can save — continues to decrease.
Along with that savings goal and your tolerance for risk, your time horizon is one of three important factors that help to determine the mix of investments in your portfolio.
Once you retire, your objective shifts from saving to a combination of saving and spending, and it is important to ensure the balance is optimal for your retirement years.
The first objective upon retiring is often the need for some liquidity; in other words, the amount of cash you may need to keep in easily accessible, lower-risk vehicles such as money market accounts or bank accounts.
In order to arrive at the amount you will need, you must determine the amount of income that you need to meet life’s necessities on a monthly or annual basis.
After accounting for Social Security, Medicare and other health insurance, pension income and other income from real estate or other sources, is there a gap? If so, how much and how often will you need to withdraw from your retirement savings to cover that gap?
Next, you must consider the bigger picture: what are your plans over the next three years?
Will you have any large expenses, such as buying a new car, replacing a roof or taking a special family vacation? Also, how much do you want to keep liquid for emergencies?
When we talk about this with clients, we tend to recommend six months or more of monthly expenses set aside to handle any short-term cash emergencies that can arise. However, some clients like to have more or less, depending on their personal situation.
Considering all these factors can help determine how much to invest in short-term, lower-risk vehicles and set up a cash flow schedule to meet your more immediate needs.
An ongoing objective that all experience throughout their retirement years is managing the market risk associated with inevitable market volatility. Pre-retirees and retirees, in particular, face what’s known as “sequence of returns” risk. This refers to the risk that the financial markets could experience a large loss just before or in the same year of retirement, leaving you with a diminished nest egg to support your current income needs. Moreover, throughout your retirement, your portfolio will experience the inherent ups and downs of the market.
Frequent reviews of your financial plan will help you adjust your portfolio or cash position as needed and also assist you in avoiding needing to try to time the market, which is not a viable strategy.
While market risk is certainly always a concern, longevity risk or the chance that your savings won’t last as long as you do, is one that is top of mind for all retirees.
The need to build a portfolio with lasting potential — at a minimum, to sustain your income needs, but also leave a legacy if that is your goal — is one of the most important objectives in a retirement portfolio. Ideally, a portfolio will have an investment mix to pursue enough growth to keep it sustainable as long as needed.
One way to think about your portfolio is to think of it as a series of layers that works together to pursue all three objectives I have outlined here.
• The bottom layer is comprised of short-term liquid vehicles designed to provide the cash flow needed for one to three years.
• The middle layer contains additional amounts needed within a decade or so and is made up of moderate risk vehicles that seek to provide an income stream while balancing volatility. This will likely include some bonds or fixed income vehicles.
• The top layer, which includes the balance of your portfolio, would be designed to outpace inflation and pursue longer-term growth, striving for that necessary sustainability.
Over time, as one layer is depleted, it can be replenished by the next layer up.
Although investing in equities can be stressful at times, it is likely that this layer would require a healthier amount of stocks than the other two layers in your portfolio.
People are living longer, and your retirement could be more years than you expect, so it is very important to have the right portfolio to help to support all your goals.
Working with an adviser can help you make some decisions on designing a portfolio that you can stick with throughout the ups and downs of the market and throughout the course of your retirement.
Whether you go it alone or work with an adviser, make sure you continue to monitor the course of your plan and make adjustments as needed to help make the money you worked so hard for work for you.
Laurie Haelen, AIF (accredited investment fiduciary), is senior vice president, manager of investment and financial planning solutions, CNB Wealth Management, Canandaigua National Bank & Trust Company. She can be reached at 585-419-0670, ext. 41970 or by email at lhaelen@cnbank.com.