Today’s retirees are facing a barrage of retirement advertisements that all promise Viagra- like investment results that deliver oceanfront living or a hillside view of rolling vineyards. Sorting through the multitude of products, from annuities to mutual funds, is a daunting task, particularly for the uninitiated.
There are no sure fire retirement plans, and any investment approach must be recommended with humility, as even the best of plans can be shredded in moments like the Great Recession.
There are, I believe, three issues worth contemplating that can at least point you down that road towards the blue 68 Camero.
The first is setting your spend rate. Advisors recommend spending 3 to 5 percent of your nest egg in perpetuity. Regardless of any given year’s investment results, one should hold one’s spending to a fixed percentage of the portfolio. This spending approach sets the tone for the golden years, as strict adherence to a 4 percent spending rate may mean those years are more gold plated than 24 carat.
The second decision point is selecting the amount of risk you are willing to take with your savings. The rule of thumb is 100 minus your age should be level of equity risk you should consider. The balance of your investments then remain in fixed income, where bonds and other debt instruments promise the return of your principle at maturity. Given interest rates are at historic lows, it may be wise to invest in shorter bond maturities in the hopes of reinvesting in the future at higher yield levels.
Finally, the products you invest in should be primarily low cost index funds and ETFs offered by a variety fund management companies. Select the broadest indices you can, such as all world equities or bonds. Once you invest, only adjust the level of fixed income versus equities when required. This should occur less than once a year, as avoiding trading the portfolio will also keep your investing costs low; a key success factor over the long term.
Set your spending rate, select your risk profile, buy and hold low cost index funds. Stay the course, and while you’re at it, enjoy every sandwich.