Investment benchmarks are kind of like all those random signs you pass on the road.
Sometimes, they’re informational. Sometimes, they’re entertaining. But all too often, they’re just downright distracting.
And if you put too much focus on the wrong ones, you could end up hurting your chances of ever getting where you want to go.
Unfortunately, all too often, investors do just that. Their attention is diverted by a benchmark that doesn’t necessarily apply to them or their plan — such as the S&P 500 index— and it can lead them astray. Suddenly, they’re moving out of their comfort zone, driving faster than they should, and maybe even taking a wild turn off the road they’re on despite the added risk of getting into a crash or running out of gas.
There’s little point in constantly checking your progress against an index or someone else’s portfolio results if they aren’t relevant to your investment strategy or your unique needs. The only measure you need to monitor is how you’re doing when it comes to your own goals, risk tolerance and timeline.
Here are some things you should be thinking about — and planning for — on the road to retirement.
1. What’s your destination?
A lot of people have no idea where they’re going in retirement. They haven’t even thought about the income they will need to replace when they don’t have a regular paycheck anymore. So that’s the starting point: How much will you need to pull from your investments to have the lifestyle you want? When do you hope to retire? How many years do you expect to be creating your own paycheck? Where will the money come from (Social Security, a pension, your 401(k), a Roth IRA, or some other source) and in what order?Advertisement
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Your income plan will be your roadmap in retirement — but it also will help guide you as you make your way toward that goal.
2. How fast or slow do you want – or need – to go?
Once you know where you’re going, you can choose the right investments for the journey based on the risk vs. the reward. If you jump into an overly aggressive strategy, you might get to your destination faster — or you might not get there at all. On the flipside, a strategy that’s too conservative might end up falling short of what you need — or it might not keep up with inflation over the course of a long retirement.
It’s important to know both your risk tolerance and your risk capacity to determine your portfolio mix. An appropriate blend of stocks, bonds and other investments can help you get where you’re going on time and in good shape.
3. Are you burning more fuel than necessary?
It’s essential to make tax efficiency a part of your retirement plan. That means looking at how and when each of your investments will be taxed and making any changes that might keep more money in your pocket.
Is most of your retirement money invested in a tax-deferred retirement account (such as a 401(k), 403(b), etc.)? If it is, you may want to convert some funds to a Roth IRA — pay the taxes now, over a period of a few years — and move forward without that worry.
Will you be in a tax bracket that could cause you to pay taxes on your Social Security benefits? That threshold is pretty low and is based year to year on your “combined income” (adjusted gross income + nontaxable interest + half of your Social Security benefits). For example, a married couple filing jointly with a combined income of $32,000 to $44,000 will pay taxes on up to 50% of their Social Security income. And if their combined income is more than $44,000, they can expect to pay taxes on up to 85% of their benefits. Medicare payments also can be affected by income level. And long- and short-term capital gains are another factor to consider when choosing investments that will remain in your portfolio in retirement.
4. Are you prepared for a few potholes?
Unforeseen expenses (high-priced home and car repairs, medical and dental bills, and especially long-term care needs) can be the undoing of a retirement plan. Yet many people motor on without any strategy for how they will cover those costs. Often, they say they don’t want to pay for something they may never use, such as a long-term care insurance or an insurance policy with a long-term care option. But the trip will be less stressful if you know where the money will come from if you need it.
5. Do you hope to pave the way for those following behind?
One of your goals may be to leave a legacy, and that too takes planning — particularly if you want to avoid dropping a giant tax burden on your loved ones. This has always been a tricky piece of the retirement journey, but the new SECURE Act has made it even more imperative to keep an eye on the road ahead, because it shortens the amount of time many beneficiaries will have to take distributions from and pay taxes on inherited IRAs. A financial adviser and/or estate attorney can help you find the right route for your family.
Yes, it’s a lot to consider. But keep in mind that once you’ve established your retirement plan, you’ll have the only benchmark you need. If your investments are providing what you require to fund your future, then they’re likely performing as needed. If they aren’t, you can make adjustments. You don’t have to worry if your brother-in-law or a co-worker passes you on the way, or let some random index push you out of the lane you like. Your portfolio should reflect your priorities and keep you on track to achieve those goals.
