Retirement investing: Where to begin
Joel Dresang: Kyle, we talk a lot about long-term investing, asset allocation, balanced portfolios. It’s always for a purpose, though. Usually, that’s for retirement. If you take a 65-year-old couple, there’s a 50% chance that at least one of them is going to live to be 90. So that’s 25 years of spending to cover. How do you invest for that?
Kyle Tetting: You know, I think it is very important, Joel, to make sure that we’re aligning our asset allocation, our overall investment plan towards those longer-term objectives.
As you mentioned, it could be a 25-plus-year retirement. So certainly, there are factors at play that maybe weren’t at play 20, 30 years ago when lifespans weren’t as long.
I think a big piece of that is making sure that we are working on a retirement plan as part of the overall investment picture. It’s a conversation we often have informally, but I think oftentimes it’s necessary to do it more formally.
Joel: So where do you begin?
Kyle: The important thing is to get an understanding of what your particular needs are. What kind of income do you want when you retire, and when are you planning to retire?
And that could be as simple as looking at a percentage of your current income or something more complicated like working through a budget to figure out what needs really are. And then also looking at what you want to do in retirement.
Joel: So you start with how much you want to spend, and then you figure out how you get there.
Kyle: Yeah. We like to look at the spending piece first because we want to make sure that retirement is what you want it to be. And, given enough time, then we can figure out, OK, how do we finance that retirement?
A big piece for most people is their social security. You can get an estimate of your social security benefit amount from SSA.gov. And it’s as simple as saying, ‘This is what my full retirement age benefit is.’ And then, you know, you work with an advisor to determine when the right time to claim social security is.
Joel: And then the rest, I guess, is more of a variable.
Kyle: Yeah, so we like to look at that social security, that pension, those other fixed sources as kind of the first leg of getting to what that income need is.
The second piece is to make sure that every other asset you have is accounted for so that we can start to figure out how we fund the rest of that income need. So you look at checking and savings accounts at the bank. You look at 401(k)s left behind at former employers.
We start to gather outside accounts and stock and bond certificates that might be in a safety deposit box at the bank. Those are all ways that we can generate some income or that we can generate some cash to finance those retirement needs.
Joel: So it sounds like a lot of legwork of gathering information from different sources.
Kyle: The important piece is to get that done upfront, so that we know what we’re getting into long before we get there.
Joel: So, like with any sort of planning, the earlier you start, the better. I can imagine, though, that if you’re 30, 40 years away from retirement, it’s harder to figure out what that’s going to look like.
Kyle: Yeah, you know, it can be difficult, but it doesn’t mean it’s impossible. And also it’s very important to start early because we can get headed down the right path the earlier we start on saving and the earlier we have an idea of what we’re saving for.
Ten years out, five years out, two years out, you’re updating that plan so that you know, ‘I’m on track for what I want.’ And then, even into retirement, still updating that plan. ‘Are my objectives from the last time we talked still the objectives I have today? And can my portfolio still sustain those objectives?’
Joel: How much does all of that planning help you as an investment advisor?
Kyle: I think it is one of the most important pieces to making sure that the way we’re investing is the right way. You know, we talk about risk tolerance. Risk tolerance is great, but if you have a very high tolerance for risk but you don’t need to take a lot of risk in your portfolio, that doesn’t necessarily mean that it’s best to take that risk.
Kyle Tetting is director of research at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May
(initially posted Aug. 26, 2015)