Retirement Questions Answered: 4 Essential Queries

What most retirement savers want to know is if they’re saving enough money. Actually, that’s one of the easiest questions to answer because you can plug in your numbers into hundreds of online retirement calculators.

The harder questions have to do with financial wellness. How do your emotions help or hurt your ability to save and invest? Your gut often determines if you’re even ready to retire.

Some investors choose to save more than they spend or may have debts that keep them from socking away money. Others may be saving diligently, but may be too active in managing their money. Many behaviors may short-circuit one’s ability to save.

Professor Harry Markowitz. (AP Photo)

Harry Markowitz, the chief architect for Guided Choice, a retirement advisory firm, knows a few things about investing. As the father of Modern Portfolio Theory, he won the Nobel Prize in Economics for his work on diversified portfolios.

Focusing on the relationship between risk and return, Markowitz’s work in the late 1950s and early 1960s laid the groundwork for millions of investors. Although it’s tough to summarize his research, it boils down to this: The more risk you take, the higher the potential returns, but the greater the volatility.

Based on his findings, most financial planners recommend a 60% stocks, 40% bonds portfolio. It’s been a benchmark for decades.

How do you tweak the stock/bonds mix? You need to be honest with yourself and ask some key questions:

— Are you saving enough given the composition of your retirement portfolio? This depends on the mix of stocks, bonds and cash. It’s a slam-dunk you won’t meet your retirement goals if you’re all bonds and cash. You won’t even beat inflation.

It’s also risky to invest all of your money in stocks. Keep in mind that in any given year you can lose up to 40% of your stock holdings. And what if there are a few bad years?

— What is the impact of taking a bit more, or less risk? “Are you saving enough to meet your goals for retirement and other milestones?” Dr. Markowitz asks. If you’re not taking enough risk in the stock market, you can easily see how much more you can save to achieve your goals.

— Are you timing the market? This is a sure way to lose money. Dr. Markowitz found that “too often individual investors will buy into stocks once the market has made some nice gains. They don’t want to miss out on the gains that friends and others have made. They also assume the market will continue to rise.

They often compound this mistake by panicking and selling when the market drops, we saw a lot of this type of activity during the financial crises of 2008.”

Pick a fixed percentage of stocks, bonds and cash that feels right to you — and will achieve your goals — and stay the course.

— Are You Rebalancing? Part of staying the course with your stocks/bonds mix is adjusting it once a year. This is called “rebalancing.”

“Professional investors will set an asset allocation, say 60/40 stocks to fixed income. If stocks go up and their allocation to equities increases to 70%, they will sell off some of their equity positions to rebalance their portfolio back to their desired 60/40 allocation.”

In addition to these essential questions, you need to ask about fund costs within your plan and how much you trade (buy or sell funds). Frequent trading will eat into your returns. And having expensive funds — charging more than 0.50% in annual expenses — will also erode your kitty.

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