March 2020

The No-Nonsense Investing Guide for Boomers

Author: Kent Thune

The baby boom generation, often referred to as boomers, includes Americans born between 1946 and 1964. This means that current ages range between 56 and 74 years. If you’re a boomer, you’re either approaching retirement or are already in retirement now. In terms of personal finance, you’ve likely done some retirement planning, specifically with regard to investing.

Do a Google search for “how baby boomers should invest for retirement,” and you get more than 14 million results. From a (slightly) cynical perspective, at least 10 million of the articles are junk, to use a non-financial term. Much of the information is either too complex, too abstract, or click bait that scares you into reading the story.

As a general, no-nonsense guide to check that your investment strategy for retirement is on track, here are some pointers:

Gauge your risk tolerance. The first step in determining the appropriate investments for you is to define as accurately as possible your tolerance for risk. Gauging your risk tolerance is important because the wrong investment mix can threaten the success of your investment objective. For example, if you’ve underestimated your tolerance for risk and the next major market correction hits, you may be tempted to abandon your strategy for fear of short-term market declines. Since assessing one’s risk tolerance is an objective exercise, it’s wise to use an outside source, such as an investment advisor or an online risk tolerance questionnaire. Vanguard has a good questionnaire, which can be found online at https://personal.vanguard.com/us/FundsInvQuestionnaire.
After just a few minutes of answering questions, the results will suggest an appropriate allocation of stocks and bonds. Also, keep in mind that your risk tolerance can change, usually towards more conservative over time.

Estimate how many years before you begin making withdrawals. The number of years you have until withdrawals begin will help to determine an appropriate risk level for your investments. Generally speaking, if you have more than 10 years before withdrawals begin, you may take as much risk with your investments as your risk tolerance allows. However, many boomers are in or near retirement already, which means these investors will generally have less risk capacity (they may not be able to afford the market risk associated with a high allocation to stocks). Depending upon your life expectancy, your allocation to stocks may need to be less than 50 percent of your portfolio.

Estimate how many years you will need to make withdrawals. Assuming you will need investment income for the remainder of your life, this planning assumption is essentially an estimate of your life expectancy. Since outliving your money is not likely a part of your retirement plan, it’s wise to assume you will live to at least 90. Family health history does impact your own prognosis for life expectancy. However, the younger you are now, the greater the odds of reaching an older age. For example, according to Businessinsider.com, a 60-year-old woman has an 89 percent chance of reaching 70, a 68 percent chance of reaching 80, and a 32 percent chance of reaching age 90. For a 60-year old man, his odds are 85 percent to hit 70, 58 percent to see 80, and 20 percent to make it to 90.

Estimate amount and timing of Social Security benefits. If you haven’t already begun receiving Social Security benefits, it’s smart to get an estimate on this income source. The best way to estimate your Social Security income is to get a statement directly from the source. Log in or create a new account with Social Security at https://secure.ssa.gov/RIL/SiView.action.

You can then get a statement of your account. Keep in mind that delaying the start of your withdrawals will increase your Social Security benefit. A general rule is that the longer you expect to live, delaying Social Security benefits becomes increasingly beneficial.

Factor in other sources of income in retirement. Will you receive income from a pension or from part-time work? Funding all of your retirement income with only your investments can be extremely difficult to achieve. Attempting to do this can delay or make impossible your retirement plan. For example, semi-retirement has become a smart means of retiring earlier without the complete reliance on investment income. Consider working in a part-time job that you enjoy and that supplements your retirement income. Once you know how much income you will draw from other sources, you can estimate how much money you’ll need from your investment accounts to fill in the income gaps.

Estimate the required rate of return. The average annualized rate of return you’ll need to achieve your retirement goals will depend upon all of the estimations and assumptions you’ve made from the points above. Since the required rate of return is relatively complex, you may need a calculator for help. It’s easy to find a retirement calculator with a simple Google search. Vanguard, Nerd Wallet and Bankrate.com all have good calculators that can help.

Use the 4 percent rule as a guide. If you’re not sure how much you can afford to withdraw or how long your money might last, the 4 percent rule of withdrawal can help. This rule says that you can begin your withdrawals at a rate of 4 percent of your total balance. Every year, you can increase the dollar amount by 3 percent (to adjust for inflation). Assuming an average rate of return of 5 percent on your investments, your money can last up to 30 years following this rule. For example, if your retirement nest egg is $1 million, you could withdraw 4 percent ($40,000) in year one. In year two, you could withdraw $41,200 ($40,000 plus a 3 percent increase). You could continue to increase the withdrawal rate by 3 percent every year for 30 years.

Plan for the order of liquidation. If you have multiple investment accounts, it’s wise to begin withdrawals from taxable brokerage accounts first, before your tax-advantaged accounts, such as a traditional IRA or 401(k). This is because tax-deferred growth is generally superior to taxable growth; therefore, you’ll want to maintain this tax advantage as long as possible. Another tax-related benefit of this liquidation order is that the capital gains taxes from your taxable accounts will be lower than the income taxes on distributions from tax-advantaged accounts. Also, if you die with money in an IRA, the assets will bypass probate and pass directly to your beneficiaries. This can be a simple but productive estate planning tool to help your loved ones after you are gone.

Monitor your plan and make changes where necessary. The final step in any smart investment strategy or financial plan is an ongoing one. Life happens and changes occur. Births, deaths, marriages, divorces, tax laws, recessions, inflation, changes in health, lifestyle, and short-term market fluctuations can all impact your investments and your strategy. By monitoring the plan, you can make adjustments when necessary.

Don’t base your investment strategies on generalities. Hopefully this article has been helpful for you. However, 1200 words does not an investment plan make. Most of the points made here may depend upon several other assumptions and factors. General rules, no matter how tested and reliable they may appear, are best used as a foundation and not as an actual plan for a unique individual such as yourself!

With that said, there is a general rule that is universal for wise investing: Keep it simple! Most investors, retired or not, can get what they need out of a handful of passively-managed, low-cost mutual funds or exchange-traded funds (ETFs). You want to enjoy retirement, not spend your time researching and analyzing investments, right? To paraphrase the famously successful investor, Warren Buffett, investing should be boring, not exciting.

Kent Thune is a Certified Financial Planner® and is the owner of a Hilton Head Island investment advisory firm, Atlantic Capital Investments. He is also a personal financial counselor to Marines and other service members on Parris Island. Thune’s financial guidance has been published at The Motley Fool, Yahoo Finance, Kiplinger.com, MarketWatch.com, Nasdaq.com, InvestorPlace.com, and his own blog at TheFinancialPhilosopher.com.

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