Retirement planning is not a “set it and forget it” kind of exercise. Life changes quickly, and it’s important to understand that your retirement plans need to change just as fast. The retirement plan you had in your 20s when you were single is not the same retirement plan you’ll want in your 40s and 50s as your kids look to head off to college. Volatility with the stock market or other investments can also impact your retirement plans. As things change, it’s important to periodically reassess your retirement plans.
When you need to reassess your retirement plans
There are a few different times where you’ll want to reassess your retirement plans. The most crucial times will be when you have major changes to your life or family.
- Marriage or Divorce
- Birth or adoption of children
- Change in employment
- Moving to a different house
These types of major life events can have a major impact on how much money you need to retire, so you’ll want to reassess your plans. But it’s not only during these major life changes that revisiting your retirement planning makes sense. It’s smart to regularly review where you’re at for retirement, just like you should be regularly reviewing your monthly budget.
Understanding volatility in retirement planning
The one time that you DON’T want to make drastic changes to your retirement planning is during a major stock market downturn. When you see those big negative amounts in your 401k or brokerage account statements, it can be easy to panic and try to sell your stocks in order to stop the bleeding.
The fact of the matter is that the stock market is extremely volatile. The stock market may average 8% or so over the long-term, but that one number masks a number of huge swings to both the positive and negative. Instead of panicking and selling when the stock market goes down, be proactive and prepare for the inevitable downturn. Sometimes the best thing to do is absolutely nothing.
Get comfortable with risk
Along the same lines of understanding volatility in the stock market, it’s important to get comfortable with risk. In general, the higher return that a type of investment will bring, the higher the amount of risk will also be. Deciding how comfortable you are with risk is an important part of assessing your retirement plans.
Risk is something that should not be feared — after all, hiding all of your money underneath your mattress is a relatively low-risk proposition. But it’s also not likely to lead to a successful retirement. Consider your time horizon — how long you have until you’re likely to retire — and adjust your risk accordingly. If you’re younger and further from retirement, you can afford to invest in relatively riskier investments. The closer that you get to retirement, the less risk that you should be taking on.
Review your portfolio allocation
Understanding and being comfortable with risk can help you as you review your portfolio allocation. Since different types of investments come with differing amounts of risk, it’s important to make sure your portfolio is allocated between investment types in a way that makes sense for your specific situation.
Generally, the younger you are and the further you are away from retirement, the more it makes sense to have most of your investments in the stock market. The stock market has more volatility but historically has provided the highest returns as well. As you get older and closer to retirement, you will generally want to move a higher and higher percentage of your portfolio away from stocks and into an investment like bonds that has lower returns but also lower risk.
Consider talking with a financial advisor
A financial advisor can be a good resource if you’re looking at making sure you’re on the right road to retirement. A trusted financial advisor can look at where you’re at now, where you want to go, and help ask the questions you need to answer to make sure you’re on the right path. If you don’t currently have one, make sure to find a financial advisor that fits with the type of advice you are looking for.
The Bottom Line
It’s important to regularly reassess your retirement plans. You should review your retirement plans on a recurring basis with your spouse, trusted friends and family, or a financial advisor. You should also review your retirement plans whenever you have a major life change, such as a new child, new job, or when you move to a new home. Following these simple steps can help you make sure that you are on the road to a solid financial future.
Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families to travel for free / cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 kids.