A financial plan can be an essential tool in guiding investors to build wealth for the long-term. Financial plans are conceptually hopeful, with the expectation that assets will grow over time to meet your future needs. But, as we all know, "life happens," and it is important to prepare for all scenarios, including tougher times such as volatile markets when an investor may see substantial declines in the market value of their investments. This is when a financial plan often takes on heightened importance, yielding reassurance and peace of mind.
The immediate concern in volatile or down markets is to consider how the portfolio is positioned to ensure the long-term strategy remains intact. The best course of action is to work with your financial professional to analyze your current investment strategy and then consider how to stabilize your portfolio, making any necessary tactical adjustments to take advantage of an eventual market recovery.
However, when there has a been a major disruption to your long-term plan, its continued success requires an understanding of the components that drive your overall plan's performance, and how altering them can impact the result years down the road. Let's examine some of those components in more detail.
Asset Growth
Asset growth generally comes from rate of return and contributions. Getting a long-term plan back on track by projecting a higher rate of return sounds nice in theory, but that may come with increased risk. Increasing contributions can be an option if the investor has access to excess cashflow or can earn more income. The investor may also cut back on discretionary spending to free up funds for making additional contributions.
Retirement Date
Your retirement date impacts your plan in two ways. First, your time horizon looks at how long your assets can grow before using them along with your ability to take more risk, considering there is time to recover from a possible downturn in the market. Second it marks the commencement of the period for using those assets. For example, an investor who retires at 60 has less time to grow their assets and must also make them last seven years longer than an investor who retires at age 67. Transitioning into a period of partial retirement for several years where some employment income continues to be earned is an option for some investors looking to ease into that full retirement date.
Source of Income
Sources of income can extend beyond the investment portfolio into social security, pensions, rental income, and annuities. Here tax considerations such as distributions from qualified accounts (i.e., required minimum distributions) versus non-qualified accounts (Roth IRAs) also come into consideration.
Spending Goals
Spending goals during retirement can take many forms. Some plans outline very detailed spending projections while others may start with a basic assumption of providing some monthly or annual number from which the investor will manage their basic needs. Important considerations are healthcare costs as well as the possibility of needing long-term care during retirement. Plans often allow for prioritization so that investors can identify needs, wants, and wishes, like providing education funding for family members, checking off bucket-list items, or leaving a legacy.
Liquidity
It is always advisable to have access to liquidity in the event of an emergency. However, when retirement gets closer, that access to liquidity takes on more importance. The ability to draw upon cash reserves to meet short-term needs is important as the alternative may be to sell portfolio assets in down markets which can have a rippling effect on the future health of an investment portfolio.
Plan Length
Finally, the length of the plan ties into an investor's probability of success. While someone may or may not expect to live beyond a certain date, this is one factor where it makes sense to overestimate. Said differently, an investor probably should not increase their plan's probability of success by planning for a reduced life expectancy!
It is important to remember that no plan is perfect, and if the probability of success falls below your comfort level, you'll need to work with your financial professional, taking market conditions into account and exploring the factors outlined above to stay on track. Before making any major changes to your portfolio, model the change in expected rate of return to see how it impacts your long-term plans. For instance, modeling a more conservative model for portfolio growth over the life of the plan is a good exercise to see what other changes you may need to consider in terms of retirement date or spending goals. Ultimately, your financial plan is an important tool to not only track your progression toward a fulfilling retirement, but also to map out alternatives and remain optimistic when life happens, knowing you are prepared.
Important Disclosures
TD Wealth® is a business of TD Bank N.A., member FDIC (TD Bank). TD Wealth ® provides its clients access to bank and non‐bank products and services. Banking, investment and trust services are available through TD Bank. Securities and investment advisory products are available through TD Private Client Wealth LLC, a US Securities and Exchange Commission registered investment adviser and broker-dealer and member of FINRA/SIPC (TDPCW). Epoch Investment Partners, Inc. (Epoch) is a US Securities and Exchange Commission registered investment adviser that provides investment management services to TD Wealth. TD Bank, TDPCW and Epoch are affiliates.
The information contained herein is current as of July 2023 and is based on information sources that are deemed reliable. The views expressed are those of the guest author and are subject to change based on tax and other laws.
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