Part I: How Long Until You Retire?
To start this series let’s take a look at the first factor that will tell you how to appropriately time the market when planning for retirement. Selling stocks at a high point sounds great but people tend to hang on a little longer than they should. We are at a historic high right now but few people are selling and many who have been sitting on the sidelines are jumping in to the market.
If we add a few more variables to the decision process then you’ll see why it’s not just about getting the highest price, it’s also about making moves the fit well with your long-term goals.
The first thing to consider is the length of time you have until retirement. There’s an easy rule I came up with that will help you keep things in line and on track. You can call it the “5-3-1” rule if it needs a name or and I’ll explain it as we move along.
Specific portfolio moves should happen at five years, three years and one year prior to retirement. This of course has a little wiggle room depending on the other two factors but we will put this building block in place first. This is a general rule based on my experience dealing with these matters so please understand there is variability in each depending on your personal situation.
At Five Years:
You need to have 40-50% of your assets protected. This will be different for everyone depending on factor #2 but for now it’s a good rule. You’ve had a couple decades or more to chase growth and by now you should be able to tell if you have enough to retire. Prudential calls the five year preceding along with the first five years of retirement the “retirement red zone.” This is when you can least afford to weather corrections or bear markets.
You should be topping off savings, protecting your gains and preparing to turn on the income during this time period. Big decisions like upsizing or downsizing a home, or even planning to move to a new place with lower taxes and nicer weather take lots of time. If any of this is part of the plan then you need to stabilize your assets because it will give you more assurance that the market won’t take you off track.
At Three Years:
You should identify a strategy that will produce income, manage required distributions and sustain a long-term growth strategy that will help you meet inflation, discretionary spending and a legacy if you choose.
This is an important point in time because it’s when many people actually do the calculation to verify they have enough saved to retire. Therein lies the reason to select products and identify strategies. Different plans require different asset levels and you need to know your plan so you can confirm you have enough to make it work.
At One Year:
Your retirement strategy needs to be in place. All the preparation done in the previous three years should be finished and all decisions made in regards to the right path. Product selection and final asset allocation done a year in advance will give you plenty of time to consider all options and settle on what you feel is best. In conjunction with this is the decision as to when it’s most beneficial to take social security. Payouts will be close to set so you’ll have the clearest picture of what’s possible. With a final strategy in place you will have more time to tie up loose ends at work and make a plan for how to spend your free time when you’re done working.
This is not something that I created out of thin air. The guidelines for the timing of retirement are the product of conversations with hundreds of people just like you. But everyone is different and real timing of the market that allows you to keep long-term plans on track depends on personal factors. Each of the above points in time may move forward or backward depending on who you are and what type of goals you have.
Some people buy annuities several years before retirement. That works just fine since most people are shifting away from risk well before the final date. Others wait and don’t do anything until the day of retirement and still others leave things hanging for several years. This will be determined for you based on the other two factors. Income needs and personal risk tolerance will help you narrow it down even more.
Next week I’ll expand on the second factor which is income needs in relation to portfolio value. This plays directly into the above timeline. When you have saved enough it’s time to start protecting assets, identifying options and finding the best strategy.
Focusing on this formula will help much more than watching a specific stock index and wondering whether it’s going to correct or keep climbing. That’s a speculators game and you’re better off avoiding it altogether.
Talk to you next week…