Critical Choices Precede Retirement

As retirement looms, crucial financial and lifestyle decisions you may have put off for years suddenly assume more importance. You no longer have decades to decide whether you'll keep a large house with its upkeep costs, whether your current level of debt is appropriate or whether to pay off your mortgage.

Before you actually hang up your career, it’s time to do some real planning. You might begin with lifestyle decisions, although these, to a large extent, depend on the financial foundation you've built. While these are personal decisions, successful retirements share at least one common element – they are rooted in reality, not fantasy.

Consider some possibilities. Will you plan to relocate? Or do developing family or financial considerations make that idea less attractive? Do you need to maintain and insure more than one vehicle? Do you expect to travel extensively in your early years of retirement, when you may be healthier and more likely to accept the rigors of travel?

Finally, can your lifestyle plans be supported by your portfolio? If not, now is the time to make adjustments rather than later. Anecdotal evidence shows that retirees who scale back their expectations are far happier in retirement than those who wake up already retired and find they can't really do all that they had planned.

Retirement Bottom Line

You’ve been marshalling your finances for years, and while you may have had intermediate goals, funding a pleasing retirement lifestyle has probably been a long-term objective. As you near your last day on the job, it’s time to make adjustments.

First, you may want to realign your portfolio’s asset allocation, especially if you’ve been an aggressive investor with a high tolerance for risk. In retirement, your time horizon is shorter, recovering from major market downturns is more difficult – and you'll probably want a regular income stream to pay your bills.

Your retirement could be lengthy, so if your wealth is sufficient, you may consider dividing your portfolio into two parts. One would be devoted to producing a regular income while the other would be allocated for growth. Ideally, this part of your portfolio would help you overcome the effects of inflation, which, historically, at least, has moved along at approximately 3.1% per year.

As you calculate how much you’ll need, keep in mind that retirement specialists suggest drawing down no more than 4% or 5% of your portfolio each year, to give it the best chance of supporting a long retirement. Remember, part of your annual income will come from any required minimum distributions (RMDs) the IRS requires you to take from your traditional IRA assets. The RMD requirement was suspended for 2009, but it is back in effect for 2010.

No matter what your decisions, the time to work toward them is before your retirement party. Please call me if you have questions or need assistance in your planning.

Time Horizon Outstrips Market Timing For Best Results

The problem with assessing investment returns over the short term is that the results are wildly inconsistent. Using the S&P 500 (an unmanaged index of 500 widely held stocks) as a measure of your portfolio, you would have gained 15.79% in 2006 and another 5.49% in 2007, for example, but you would have lost 37% in 2008.*

Glance at one-year-period S&P 500 total returns from 1926 through 2007 and you find that, although the average annual total return over that time period was a 10.37% gain, only four of those years were in that range (8% to 12% positive total return). Indeed, 31 of those years were well above that level, while five were substantially below. Nevertheless, while 59 of those years showed gains, only 23 produced losses.

Using the S&P 500 measure, it’s clear that the most successful investors remained fully invested through 20 years of market gyrations. An analysis of 10-year rolling periods of total return for the S&P 500 between 1926 and 2007 by Legg Mason Investor Services showed that investors who stayed the course for decades at a stretch were rewarded with positive gains 97% of the time. Only two decade-long periods during those years resulted in negative total returns. Of those rolling 10-year periods, 70 were positive and only two were negative.

The S&P 500 example makes it clear that the successful investors would have been those who stayed invested through the worst of times. That means staying invested when it may be most tempting to pull back.

If you would like to discuss long-term investing as it may apply to your financial goals, don't hesitate to give me a call.

Financial Planning:
Time Remains for 2009 Retirement Contributions

The door is slowly swinging shut, but if you need to make up for any 2009 shortfall in your traditional or Roth individual retirement account contributions, you have until April 15 to do so. Every year, you have until the income tax filing deadline to complete IRA contributions for the previous year.

The 2009 limit – which remains the same for 2010 – is $5,000 (or $6,000, if you're 50 or over).

Even if you choose to contribute a pre-tax portion of your salary to your company’s 401(k) plan, you’re entitled to either a traditional IRA or a Roth (if you qualify under the salary limits).

The Roth account can grow tax-free, and there are no required withdrawals, so the whole amount can be passed along to your beneficiaries tax-free under most circumstances.

Keep in mind that if you’re eligible to claim an IRA contribution deduction and are also due a tax refund, you can claim your deduction on your Form 1040 and direct the IRS to automatically deposit the refund into your IRA account – which must happen by the close of business on April 15, 2010, for this idea to succeed. Filing your refund electronically may help to speed up this process.