Jason Stipp: I'm Jason Stipp for Morningstar. If you're approaching retirement, and you're feeling a little bit behind, there are some ways you can play catch up that might improve your odds of success. Here to offer some dos and don'ts is Morningstar's Christine Benz, our Director of Personal Finance. Christine thanks for joining me.
Christine Benz: Jason great to be here.
Stipp: Christine we read a lot of statistics in the newspaper about how underprepared folks are for retirement and a lot of folks probably do feel like they could be doing more especially as they are approaching retirement. You have some tips for them. Some dos and don'ts. The first one seems pretty obvious, but not always feels like it's easy for folks to do and that's just to ratchet up that savings rate.
Benz: That’s right this is not a fun point to make, but it is something that will be the most impactful when it comes to whether your retirement plan works or doesn't work. Your own savings rate is going to be by far the biggest determinant of whether you get there. It's going to be a much bigger determinant than your investment picks. So it's important to focus on saving as much as you can. What I have heard from talking to financial advisors who work with clients, who are playing catch-up in this way.
Is that for many families, especially once the college years are behind them, but the individuals are still in their peak working year. So they are earning good incomes, but those can be great years to make up for lost time. So maybe your kids are through school or mostly through school, to really try to kick up the savings rate in those years between say, age 55 and age 65, you can really begin to move the needle by increasing your savings rate.
Another thing to consider is not just your savings rate, but also as you get close to retirement. You can start to think about what retirement will look like for you and start to think about whether there are perhaps places where you could cut your living expenses in retirement. So one of the biggest ticket changes that investors can make as they get close to retirement is just start thinking about downsizing their homes. Certainly that’s another area where planners like to see clients willing to be perhaps a little bit flexible about where they live and will they perhaps relocate to a smaller home with smaller maintenance costs and then you perhaps bring some of the equity from the house into the retirement portfolio as well. So that can be beneficial from a couple of different standpoints.
Stipp: So that last part is key and a don't that you want to keep in mind here and that’s don't rely on rules of thumb for how much retirement will cost because it really has to do with the personal factors that you bring to the table.
Benz: That's right. So as you get close to retirement I think you start getting a clearer picture of what you want from retirement. What sort of lifestyle you want? How much travel you want to do? Mow much work you might want to continue to do in retirement. So as you start to take stock of those factors, I think then you can be more realistic about what percentage of your working income you'll need when you're retired.
Lot of people have heard about this 80% rule, this 80% income replacement rates. So you might need to replace 80% of your working income when you are retired. In reality and our colleague David Blanchett has done a lot of work on this topic. In reality, retirees are all over the map on this front.
In particular, more affluent retirees those who are saving a lot during their working years may be able to get away with much, much less in retirement than they have while they are working in part, because they were saving so much of what they earned.
Stipp: And you mentioned there about work and the decisions that you make about work, that's a really key driver to do think about whether working can really work for you and it really can in a number of ways if you work a little bit longer.
Benz: That's right. This is an area that can really help move the needle as well. And it helps in a few different ways. One is that if you are still working, you are able to continue to make contributions to your retirement plan. Importantly, you are also able to delay tapping that portfolio. So, the fewer number of years over which you'll be tapping that portfolio, the less you'll need to accumulate. So if you're able to shrink that time horizon. And finally, if you are able to delay filing for Social Security, delay receipt of your Social Security benefits. That to can be a very, very impactful driver. It can help your portfolio plan be that much more effective because you are able to pick up a higher payout for each year that you delay up until age 70.
Stipp: And also may be think a little bit more broadly about what work means to you when you get to that point in your life. It doesn't necessarily have to be the way that you've always been working.
Benz: That’s right. Some people think, I can't wait to get out of here out of my job, and then certainly not healthy to continue to work longer than you need to in a job that you don't love. But I think if people are to step back and think broadly about career paths sort of encore careers as Morningstar contributor Mark Miller calls them, where you are able to pick up at least some income may be doing something that you really enjoy. Even if that income isn't as high as it was in your main career path. That is still income that can help reduce your portfolio withdrawals. It might also be part-time work.
So be willing to think broadly about working, it doesn't necessarily have to mean that you stick it out in your current job until age 70. Maybe it does, but for some people it might mean transitioning a little bit to something that they find more enjoyable.
Stipp: We have an important caveat here and that’s don’t expect that you'll be able to work longer.
Benz: That's right when you see studies, surveying folks who are behind in terms of retirement readiness. This is a tactic you hear a lot about, that my strategy is to continue working until I die. While that may be fine for the segment of the population who remains healthy, who can keep their job, who has healthy spouse or who doesn't have elderly parents to take care of. But for a lot of folks things just don't lineup all that perfectly. So that can't be your only plan. You also need to be pulling some of these other levers to make your retirement plan work in case that fallback plan of working longer doesn't play out.
Stipp: And last tip that you have has to do with how you structure your portfolio. So if I do feel like I'm behind. I've run some projections and I want my portfolio to work harder for me. What are some tips to make sure I'm doing that sensibly.
Benz: Well, I think there are ways to look at your portfolio's total asset allocation, for example, that's really going to be the main determinant of how that portfolio behaves. And look at some guidelines or talk to an advisor. Find out what is a reasonable equity allocation for someone in your age band. For a lot of people coming in to retirement that might mean in fact that they have upwards of 50% of their portfolios in stocks. The reason you would want to emphasize stocks would be that over time they do have the greater long-run potential than other asset classes.
So you might nudge up your equity exposure if for example, you're looking at some target allocations and maybe the conservative version is 40% equity and the more aggressive version is 60% equity you could go up toward the high end of that range.
Stipp: What about other areas of the portfolio like emerging markets, can you add a little bit more spice. If you feel like it could boost your returns.
Benz: Potentially you could think about adding around the margins of that portfolio. So the asset allocation would be the key decision to make, and there you might err on the side of being a little more aggressive. But even within that equity allocation you could highlight a few more – a few asset classes that have historically had slightly higher returns along with higher volatility associated with them. So that would be small cap stocks. It might be, a dash more in emerging markets than otherwise would be called for.
You can do a few things like that around the margins, you just don't want to throw risk control completely overboard because at some point you are going to need to start spending this money. And you don't want have to be withdrawing from wildly gyrating portfolio.
Stipp: Just know going in that those riskier assets will cost for a bumpier ride in bad markets. But you say, one thing you really don't want to do at this point is panic and really try to swing for the fences with a few stock positions that you think are going to return 10 or 20 times for you.
Benz: This is something that you sometimes see people who are feeling nervous about their retirement readiness wanting to do that, they want to own that sector funds. That they think is it can't miss or they want to emphasise a given region or a country. Here again that’s maybe something that you could do around the margins of a portfolio, but you certainly wouldn't want to sink too much of your portfolio into a very large bet on a single region or a single sector or even a single company. The risk of doing that obviously is that you could end up even further behind than where you started from. If things didn't play out as you hoped they would. You could find yourself digging out of an even bigger hole. So I think you want to be careful about taking too much risk in your portfolio at this life stage.
Stipp: And the kind of market that we've had, probably has people feeling pretty confident about their investment selections, but nobody exactly knows what the future might hold.
Benz: That’s a great point too.
Stipp: Alright Christine thanks so much for these tips to help folks catch up for retirement.
Benz: Thank you Jason.
Stipp: For Morningstar I'm Jason Stipp. Thanks for watching.
