Morningstar - Q2 2020 - 9

Yet there are strategies to build in flexibility
without completely turning a person's standard
of living upside down, including the notion
of simply forgoing inflation adjustments in down
markets or employing small but permanent
spending cuts in periods of market weakness.
Research also suggests that new retirees,
in particular, should employ a modest starting
withdrawal amount. Somewhat counter-intuitively,
that owes less to the very weak stock market,
where market downdrafts actually increase future
return prospects, and more to very low yields
in place today. (Starting yields have historically
been a very good predictor of what bonds
are likely to return over the next decade. The
answer: Not much.)
Exercise Flexibility and Creativity
If investors are not yet retired or are early in their
retirement, one of their most valuable tools
doesn't relate to their portfolio at all, but rather
to the rest of their life: How flexible are
they with respect to the contours of their plan-
working longer and reining in spending?

There are a lot of levers investors can pull that
fall under the heading of flexibility. If they're not
yet retired, being willing to work a bit longer
enables their portfolio to recover (at least partially),
allows them to make additional contributions,
and makes delayed Social Security filing possible.
Working longer also means that they'll be making
withdrawals over a shorter time horizon.
Of course, there's a realistic possibility that
weakness in the broad economy could limit some
employees' ability to work longer. That's
why it's important to remember the other side
of the ledger: Are there lifestyle adjustments
that could be made to reduce in-retirement
overhead in case a person can't work longer or
decides he or she doesn't want to? Such
changes will usually be easier to undertake early
on in retirement than after a person has
been retired for several years. Relocating from
an expensive part of the country to a cheaper one
can be one of the most impactful ways to
meaningfully reduce in-retirement spending, but
any such decision is obviously about a lot
more than money.

Ultimately, it's all about finding the right balance
given priorities. If an investor's vision for
retirement is fixed on pursuing a very specific
lifestyle-lots of travel, for example-
then working longer or part time may be the best
avenue to making the retirement plan add
up. If the person is more flexible on the lifestyle/
spending front, he or she may be able to
retire earlier.
Financial advisors have a role in helping clients
assess their retirement strategy. But determining
the approach to some of these lifestyle
considerations requires clients looking inward and
being clear on their vision for retirement.
Assess-but Don't Obsess
You often hear market experts caution that
it's a mistake to mess with portfolios in the midst
of a volatile market downturn like the one
we're experiencing. That's absolutely true for
people who are many years from retirement.
Short-term volatility is unnerving, but if investors
have a long time horizon to retirement, it's
something they have to put up with if they want
to experience meaningful gains over time. If
they can, they may even want to add more to their
accounts during periods of market weakness.

The hands-off approach is also right for people
who have well-laid retirement plans. If they've
been derisking their portfolio as stocks have gone
up over the years, it's probably best they give
their portfolio a wide berth and pay as little
attention to it during this crisis as they possibly
can. (The bucket approach has held up well,
for example, and could easily be left unattended
until year-end or even later on.)
But what if investors are getting close to
retirement but haven't looked at their portfolio in
a long time? Is it too late to make adjustments?
The answer depends on a few key variables: their
asset allocation given their spending horizon,
how firm they are on their retirement date, and the
adequacy of the nest egg they have left. If
they haven't already retired and are determined to
do so soon, they should run the numbers on
whether their planned withdrawals, combined
with the presence of nonportfolio income sources
like Social Security, look sustainable. If the answer

is yes, they may want to derisk to ensure that they
have enough liquid assets to draw upon in the first
part of their retirement. On the other hand, if their
plan was looking tight coming into the current
downturn (and that describes many Americans),
they need the growth that comes with letting their
equity position ride, even if that means that they
could have to delay retirement a few years.
Revisit Nonportfolio Income Sources
Given that investors' portfolios have likely
fallen in value, it's more important than ever for
them to make smart decisions about any
nonportfolio income sources they'll be bringing
into retirement: when to claim Social Security,
whether to purchase an annuity and if so
what kind, and whether to choose the lump sum
or the annuity if they're eligible for a pension.

Because these decisions are so crucial and
in most cases irrevocable, here's another spot
where advisors have an important role.
Be Good to Yourself
Last but not least, investors shouldn't let concerns
about retirement plans overwhelm what's
really important. If they're safe and healthy-and
their loved ones are safe, too-they'll be in
the best possible position to take care of
everything else, including finances. And staying
healthy has direct implications for the viability
of their financial plan in retirement. While
healthcare expenses tend to trend up as people
age, they're also incredibly variable; some
retirees' out-of-pocket outlays are significant,
while others' are much smaller.

Of course, we don't exert complete control over
our healthcare outcomes. But practicing the boring
old strategies of eating well, staying active,
limiting stress, and getting enough rest certainly
can't hurt. Research also points to a connection
between social interactions and health and
longevity. So, make time for those family dinners,
schedule FaceTime conversations with your
friends, kids, and siblings, and take part in one of
the Zoom happy hours that are so popular. And
don't forget to celebrate birthdays. K
Christine Benz is director of personal finance
with Morningstar..

morningstar.com/lp/magazine

9


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Morningstar - Q2 2020

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Contents
Morningstar - Q2 2020 - CT1
Morningstar - Q2 2020 - CT2
Morningstar - Q2 2020 - Cover1
Morningstar - Q2 2020 - Cover2
Morningstar - Q2 2020 - 1
Morningstar - Q2 2020 - 2
Morningstar - Q2 2020 - Contents
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