Over the past couple weeks we have talked about the indicators that allow you to decide when to time your exit from market-based securities.
The idea is to give you some level of control so that you can decide when and how you retire rather than having market performance decide for you.
So we had three factors that will help determine when timing is right so that you can make decisions that are based on long-term goals instead of wild swings in the market.
First, we looked at how length of time until retirement gives you an idea of what level of risk is appropriate. The closer you get, the less risk you need to take. On average, it takes the stock market around three years to recover from a bear market. You don’t want to tread water in the years before retirement so you need to shift assets to safety before you run the risk of declining portfolio value that will cause you to alter retirement plans.
Next, we talked about the main indicator that everyone needs to consider and that is income needs in relation to portfolio value. The amount of income you need for necessary and discretionary spending in retirement gives you an objective benchmark. Consider your income needs first and once you have reached the level of assets needed it is reasonable to protect enough assets so you can maintain expectations regardless of what happens in the market.
And finally, personal risk tolerance will cause you to adjust either of the first two. There are those who don’t mind swings in the market, knowing that the market will always recover and continue to grow. There is an equal number of people who don’t care for risk at all, don’t trust the market and would rather preserve assets and see continual, incremental growth over time.
If you prefer more risk in return for greater growth potential then you might be inclined to stay fully invested in the market all the way up to your retirement date or even beyond. And if you have enough in your portfolio to sustain income withdrawals in retirement then too much risk might require a spending adjustment during volatile markets.
Those who don’t take the risk can use the same indicators and sacrifice growth for the peace of mind that comes with predictability.
But, it’s not my job to tell you how much risk to take. Rather, I try to explain how protecting your portfolio the right way can result in continued growth and accumulation throughout your retirement years. The proper strategy can give full protection and greater growth for those who are conservative as well as less volatility and more predictability for those who continue to chase growth at all costs.
Eliminating losses is an obvious way to enhance wealth accumulation because it allows you to maintain a higher starting point during times of recovery. Appropriate asset allocation becomes more important as you approach retirement because systematic withdrawals enhance the effect of volatility on asset value.
Your personal risk tolerance will tell you whether to use the indicators mentioned over the last couple weeks. Capping the three part series this week has been really good timing. At the close of business Friday, broad US markets were down about 4% this week. If you don’t mind risk then it won’t bother you to see a slight drop in asset value. But if it changes the way you view retirement then you need to take a different approach.
As you get closer to retirement, a certain level of assets need to be protected so that you know income needs in retirement can be secured. Personal risk tolerance will determine whether you want to push for more or play it safe.
When do you plan to retire?
Have you saved enough to make it work?
These are two of the most common questions I get from the thousands of people on this email list. Only you can provide the answers and I’ll do what I can to help.
Talk to you next week…