The significant stock-market volatility seen in the first two months of this year has a lot of investors worried about their retirement savings. According to one Bloomberg story, nearly 4 million people contacted Fidelity on Jan. 4 alone, concerned about the effects of the market’s fluctuations on their investments.
Market gyrations and steep declines are nerve rattling, to be sure. They also serve to remind us of the important role our retirement accounts play in our futures, perhaps forcing us to take a deeper look at our retirement preparedness and asking ourselves some important questions:
“Do I understand the markets well-enough to withstand market volatility?”
“Am I saving enough money (and investing it wisely), so I can spend my later years more like Mary and less like Martha?”
“Do I fully understand the amount of savings I need to replace my income in retirement?”
“Am I doing all I can to effectively prepare for when I work less or stop working altogether?”
These are daunting questions, particularly if you are new to these matters or aren’t actively engaged in your retirement plan. These questions can be even more daunting when pondered during difficult market climates.
I am reminded of Matthew’s “Parable of the Talents.” While subject to many interpretations, the parable clearly emphasizes the importance of proper stewardship and the weighty responsibility that comes with assets entrusted to our keeping. Ironically, market climates might one day have us identify with the first two servants, who doubled their talents, and on another day identify with the servant who buried his talent for fear of failing at the task of growth.
Burying our talents is not an option, however. Rather, it is incumbent upon us to properly tend to our retirement, seize the responsibility before us and take the time to learn how to become proper stewards to our future selves.
Here are a few simple questions answered to help guide your plan, including:
How much of my income will I need in my retirement years?
A simple rule of thumb is 60%-80% of pre-retirement salary. This can come from a variety of sources, such as social security, pension plans, 401(k) or 403(b) savings plans, savings, etc.
What percentage of my wages do I need to defer to get there?
Current estimates show that individuals need to defer at least 12% of their earnings into a retirement savings-plan vehicle. Some of this may come from the employer through a matching contribution or other type of arrangement. If you are not sure, ask your employer. Right now, you can save up to $18,000 a year and an additional $6,000 a year if you are over 50 years old.
Which types of investments should I buy?
There’s an old adage that goes something like: In investing, you get what you don’t pay for. Keep costs as low as possible through a diversified blend of low-cost index funds. Even better, there are certain index funds that are screened to reflect Catholic values. There are many resources available to help you build a portfolio. Our firm’s advice tools can be found at InvestingforCatholics.com.
What percentage of stocks to bonds makes sense?
While each individual’s personal situation is unique, a simple rule of thumb is: The amount one should invest in stocks should be 120 minus your age. So, if you are 50, your portfolio should have approximately 70% stock funds and 30% bond funds. Personal situations, including your specific risk-tolerance level and other circumstances, may cause your right blend to be different, so ask questions.
Should I hire a professional adviser?
Good question. The right adviser can help you identify the most appropriate mix of funds, keep you on track during market volatility and avoid the costly mistake of selling in a down market, and help you move toward your goal of retirement readiness (just to name a few). If you are looking for an adviser, a good place to start is with a fiduciary, fee-only adviser. Fiduciary advisers accept the highest level of commitment to their clients and are required to put their clients’ interests ahead of their own interests — even when it goes against their own interests. Not all advisers are fiduciaries. To ensure you are working with a fiduciary, make sure he or she is an “Investment Adviser Representative” of a “Registered Investment Adviser,” preferably registered with the U.S. Securities and Exchange Commission (SEC).
It is also important that you understand how the adviser gets paid. Fees should be fully disclosed in advance and agreed upon in writing. Finally, you’ll likely want to steer clear of an adviser who gets paid by mutual funds, as there will always remain the concern about why that particular fund was chosen in lieu of funds that pay nothing to the adviser. Simply put, advisers worth your time and trust should be willing to take the time to discuss fee arrangements and the value they bring for the fee they charge.
Are managed funds a good idea or should I build my own?
Risk-based, balanced funds or target-date funds have become very popular in employer-sponsored retirement plans. These can be good options for those who prefer a simple approach to managing their retirement, as they automatically adjust over time. Seek those built with low-cost index funds, and if they are not offered in your plan, ask your benefits director if you can get them. It’s in their best interest, too.
Simple Is Better
Albert Einstein is famed for saying, “Make things as simple as possible, but not simpler.” This is sage advice for those seeking to save and invest for retirement. A simple plan will be easy to stick with for long-term success. In times of market volatility, however, even a simple plan can be difficult to stick with. So take a deep breath and remember that markets go up, and they go down. Over the long-term, however, the global capital markets have rewarded investors who stay the course. And remember, tempting though it may seem, it is never a good idea to bury your talents.
Mary Brunson is a vice president and wealth adviser at Index Fund Advisors, Inc., as well as Investing for Catholics,
a division of Index Fund Advisors Inc. She is the co-author of Tending the Flock: Shepherding Catholic Retirement Plans.