Revisit Retirement Plans Now
OCEAN CITY - Faced with declining portfolios and ongoing market volatility, many people nearing retirement have been forced to rethink their plans. Some are making adjustments to their lifestyles, while others are considering working longer than they had expected. According to a study by the Spectrem Group completed in November 2008, as many as 20% of the most affluent investors surveyed felt that they had been forced to put off their retirements indefinitely.
The good news is, there are strategies that can help you regrow your portfolio and create reliable sources of retirement income. To take full advantage of all these strategies, it is crucial that you revisit your retirement plan now.
The first order of business is to assess the current value of your assets and to map out sources of future income. It's impossible to know when, or how strongly, the markets will rebound, so it's important to make sure your retirement portfolio is positioned to make the most of whatever occurs.
'You have to recalibrate all your projections and cover a wide range of new scenarios,' says Aimee DeCamillo, Head of Personal Retirement for Merrill Lynch. 'You should take into account unexpected life events, like the loss of a job or a family illness, as well as future market events like another downturn or even a strong bull rally,' she explains.
You also have to take a fresh look at how diversified your portfolio really is. 'While most diversified portfolios may be down as a result of the market downturn, concentrated portfolios are down further,' says Christopher J. Wolfe, Chief Investment Officer for Merrill Lynch's Private Banking and Investment Group. Look at maintaining diversification across a wider variety of asset classes, and then look to diversify within each of those asset classes, he argues. 'It's the only way to help mitigate the effect of potential losses in the future.'
Because the current downturn may have changed your risk tolerance as well as the value of your assets, you may also want to revisit your asset allocations to make sure they reflect your new risk mind-set. But keep in mind that in order to meet long-term goals and keep up with the cost of inflation, some exposure to risk through growth-oriented stocks is important.
Once you have a sense of how much retirement income your portfolio may provide, add your noninvestment sources •€' such as pension income from a current or former employer •€' to the equation. Next, consider how much you'll need to live on during retirement. If there's a gap between your monthly income stream and your expenses, you'll need to consider how to make up the difference.
Staying at work a few years longer can give you time both to bolster your savings and to reduce the number of years your nest egg has to fund. If you decide to postpone retirement, think of your income during this time as part of your net worth, an asset to be invested wisely.
Working longer holds other advantages beyond income. A few more years of company-supported health care and retirement-plan contributions give you that much more time to build your retirement savings, points out Katherine Roy, Director of Personal Retirement Innovation and Planning for Merrill Lynch.
Whether you decide to retire as planned or stay in the workforce a little longer, the process of analyzing and discussing your options is bound to give you a stronger sense of control during this unpredictable time.
(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)