Every retirement plan and portfolio begins with your personal situation. Unless you are extremely wealthy, you probably live on a budget of some sort. Building a portfolio starts with your current budget, then looks forward to long term goals such as retirement, vacation, or college expenses. No investment decision makes sense without this starting point. Pension funds and insurance companies take the same approach with their portfolios. Using long term income and spending assumptions, they build an investment plan and portfolio that can grow over time to augment and meet those long-term spending needs. You can adopt the same approach to develop a portfolio based on your specific situation using the tools and investments sophisticated institutional managers use. There is a balance between your desired spending lifestyle and how much money you have to invest. Those starting with large amounts to invest or with modest spending needs can afford to take lower levels of risk in their portfolios. Those starting with limited dollars to invest or with ambitious spending goals need to take more risk with their investments. The reason is quite simple: risk and return are related. Higher returns can only be achieved by taking more risk. There is no way to achieve high rates of return without taking on high levels of risk. Any adviser that says otherwise is a crook or liar. As a retiree and investor, you only control two variables in your retirement plan: saving and spending. Market returns are uncertain and past performance cannot be guaranteed to repeat when it is convenient for you. The purpose of the long-term plan is to expect swings in the markets over time, but build a durable portfolio that can survive normal volatility and hopefully take advantage of the panic and euphoria that permeate modern investing.
Your current personal situation
The first step in building a portfolio is assessing your personal situation. There are several key pieces of information needed: 1. List your assets a. Property b. Investment and retirement accounts c. Pension plans or lump sum payouts d. Annuities 2. List your liabilities a. Mortgages b. Loans c. Credit card debt 3. List your sources of income a. Work b. Social Security c. Pensions 4. List your living expenses a. Housing b. Food c. Car d. Insurance e. Taxes f. Vacation plans g. Health care This information is needed because it defines the parameters for building a long term financial plan. Portfolios are constructed from current assets to supplement income like Social Security to meet future living expenses. A financial plan is a multiyear analysis that combines all of your income and expenses for the duration of your life. Once you have collected information on your current situation, it is time to consider your future situation.
Your future situation
Your future income and expenses are critical components of your future situation. These may change as you enter and progress through retirement. It is quite common for families to spend more in the early active years of retirement, then spend less after they complete their bucket list. Spending sometimes picks up at end of life for health care expenses. Remember, many situations are similar, but each family is different regarding assets, spending, health and risk tolerance. So in addition to your current income, your future cash flows also need to be defined. Here are some key future factors to estimate:
1. Retirement Age
2. Social Security timing and income level
3. Special expenses like vacations
4. Lifespan estimates
Once you collect these building blocks, you'll be able to start drafting your long term plan.
Robert Lloyd, CFA® is President and Chief Investment Officer of Lloyds Intrepid Wealth Management, and author of the book CENTRAL MARKETS. Since 1994, he has held positions as a trader, analyst, portfolio manager, and wealth manager while working at Invesco, CCM Opportunistic Advisors, and Merrill Lynch. In another life, he served 8 years in the U.S. Navy as a Naval Flight Officer flying in the S-3B Viking. For a complete resumé, visit his profile at LinkedIn.
Rob holds a BBA from the University of Notre Dame and an MBA from the University of Chicago.
Rob is a Chartered Financial Analyst.
Lloyds Intrepid LLC is doing business as Lloyds Intrepid Wealth Management. Lloyds Intrepid LLC offers investment advisory services in the State of Texas where registered and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. Lloyds Intrepid LLC and its advisers do not provide legal, tax or accounting advice. Lloyds Intrepid LLC formulates retirement plans, investment strategies, portfolio construction and investment due diligence for clients with signed investment advisory agreements with us. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All opinions and outlooks are subject to change.
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