All of the same asset allocation principles that were considered during the Accumulation Period (working years) should be applied during the Distribution Period (retirement years). Your goal in allocating assets for any endeavor is to create an efficient mix of investments that match your risk tolerance and consider your time horizon. As your time horizon decreases throughout retirement you will want to adopt a more conservative approach to investing by favoring less risky investments such as stable value and bond funds. However, you will probably want to allocate a small portion of your investments in various types of stock funds to help keep pace with inflation, and to maintain an efficient mix. Creating and maintaining an efficient mix of investments means that you are combining different types of investments to achieve the highest return with the least amount of risk. We must recognize that it's impossible to consistently predict which type of investment will perform the best, or worst, in a given year. Therefore, the purpose of using several different types of investments is to prevent extreme losses, by minimizing exposure to a single poor-performing investment, and to maximize the probability of a gain in another investment class.
This refers to your individual ability to tolerate short-term increases and decreases in the value of your investments. While CCOERA or an independent financial planner can provide suggestions and guidelines as to how you should allocate your investments, you may not feel comfortable with the suggested level of risk. Some people are opposed to investing any of their money in stocks, because they prefer the more predictable returns of stable value and money market funds. However, another person may feel that a suggested allocation is far too conservative, because the returns from conservative investments are historically lower, and they are very comfortable with short-term volatility. Ultimately, only you can decide an appropriate level of risk for your retirement investments. For assistance with risk tolerance questions, please contact CCOERA to speak with a Retirement Counselor.
nvestment Horizon or Time Horizon are terms used to reference the period of time your money will be invested. As mentioned previously, when you enter retirement your time horizon is obviously shorter than it was when you were in your thirties, however, it's still several years. In the section of this guide regarding life expectancy there is a table of the current American life expectancy averages. According to the National Center for Health Statistics, the average 65-year old American will live for another 18 years. Remember, this is an average, so a person in better than average health has greater than a 50% chance of living longer than the average. Regardless, an eighteen-year time horizon is quite a long time to invest. This will allow you to hold some stocks in your portfolio with sufficient time to weather short-term ups and downs.
CCOERA offers participants several different methods of choosing and maintaining a mix of investments. These are the same options made available to participants during the Accumulation Period. In recognition of the many different types of investors, our goal is to provide CCOERA participants with several different methods of investing retirement assets. With this in mind, we provide options for the savvy investor that wants to maintain complete control, and options that require minimal attention. You may choose from the following methods:
- Create and Manage Your Own Mix
- CCOERA's Pension Portfolios
Create and Manage Your Own Mix
Even though investing may seem like a daunting task to some people, others like the idea of managing their own investments. These are primarily investors with the high-level of interest required to continually monitor and make necessary adjustments to their portfolios, as well as adequate knowledge and understanding of investing principles. This option will also appeal to those that hire a financial planner to manage their investments for them. Whether you plan to do it yourself or hire a professional, CCOERA maintains a structured investment evaluation policy that will provide a quality menu of investment options to choose from in our CCOERA Select Funds menu, and thousands more through the Self-Directed Brokerage Option.
CCOERA Select Funds
With more than 12,000 mutual funds currently offered to investors the task of evaluating and identifying a small manageable group of funds that represent the superior offerings in each asset class is a time consuming process even for the pros. While there are numerous financial publications and television shows that offer their favorites, these picks generally focus on the most popular funds or last year's top-performers, which is old news and may not be appropriate just because the fund has a recognizable name. To address these problems and assist investors with this process, CCOERA takes care of the majority of the work by retaining a professional independent investment advisor to select and continually evaluate the funds offered through the CCOERA Select menu. Our advisory firm monitors the management, relative risk, expense ratio, and investment performance, of each fund with attention and detail unattainable by individual investors. When a fund fails to meet or exceed specified criteria it is subject to replacement by another fund within the same asset class. The result for participants is a selection of funds that are distinct from one another in their investment objective, and are among the top-performers in their respective asset classes.
Self-Directed Brokerage Option
For participants that wish to invest in funds not included in the CCOERA Select menu or individual securities (stocks, bonds, etc.), CCOERA offers a Self-Directed Brokerage option. This alternative provides participants access to most publicly traded mutual funds, and virtually any publicly-traded stock or bond, as well as additional investment vehicles. Participants may invest up to 90% of their account(s) assets through this option. For complete information regarding the Self-Directed Brokerage Account, speak with one of CCOERA's Retirement Counselors.
How Long Will It Last?
Of course this depends on how much you withdraw each year, and the rate of return on the money still in your account. The chart shown below will give you a general idea as to how long a retirement income would last based on different withdrawal amounts and a constant rate of return. For example, if you started by withdrawing 6% of your account balance, increased the distribution by 3.5% each year (for inflation), and earned 7% interest on the remaining balance each year - the account would provide retirement income for 23 years. Although this chart can be helpful in providing a general idea, in the "real world" you cannot count on inflation of exactly 3.5% each year, or earning 7% interest every year over a twenty-plus year period.
To help you better understand the effects of market volatility and inflation we've included three historic tables that illustrate the actual effects of inflation and different investment strategies on a distribution started many years ago. In all three cases the beginning account balance is $250,000, and the annual withdrawal in the first year is equal to 5% of the account balance ($12,500). After the first year, the amount withdrawn is increased by a percentage equal to the previous year's rate of inflation. The difference between each of the two charts are the investments selected:
Managing Your Investments During Retirement
When you begin receiving a distribution, you may instruct CCOERA exactly which fund(s) to sell each period to pay for that distribution. This can be very helpful to an investor that maintains an investment mix that includes both stock funds and fixed income investments. By always maintaining an adequate amount in the CCOERA Book Value Fund to cover your periodic distributions, and instructing CCOERA only to distribute money from this investment account, you can manage the sale of your stock funds when you believe the time is appropriate.
Which investments should I sell first, and when?
There are two schools of thought regarding the process of selling your investments to convert them into retirement income - Averaging Sales Over Time and Timing Sales According to Market Conditions. Both procedures involve a certain amount of risk because it's impossible to predict the future performance of the stock market.
Averaging Sales Over Time
This is, by far, the easiest method of converting your stock mutual funds to retirement income because there's no monitoring or decision making required. Rather than instructing CCOERA to pay your periodic distributions from a specific fund, you may simply request that your distributions are paid from all of your funds on a pro rata basis. For example, if your investment allocation is 50% CCOERA Book Value Fund, 35% PIMCo StocksPLUS Fund, and 15% Fidelity Low-Priced Stock Fund, then a $1,000 distribution would be funded by selling $500 from the CCOERA Book Value Fund, $350 from PIMCo StocksPLUS, and $150 from Fidelity Low-Priced Stock. As your investment allocation changes over time, the percentage sold from each fund would change as well. The only risk in this process is that you are committed to selling shares of all the funds, regardless of market conditions. Therefore, by default, you will sell shares when the market is increasing in value, and when the market is decreasing in value.
Timing Sales According to Market Conditions
Any approach to investing that involves timing the stock market comes with increased risk compared to methods that adhere to the principles of long-term averaging. With that stated in advance, you might consider some of the following modified methods of timing sales according to market conditions. Market Timing is the process of buying, or in this case, selling shares of a fund at a specific time, based on an investor's intuition and belief that the time is right. Generally, the goal of market timing is to sell at the peak of a market cycle in order to achieve the maximum gain. Obviously, this would require an investor to continually monitor (hourly) the market, information, and economic change that could affect the investment in the future.
A more simplified approach, which entails reviewing your portfolio and market performance at longer intervals, such as quarterly or annually, is to avoid losses and sell for a profit, rather than attempting to guess the timing of a market cycle peak in pursuit of the maximum profit. An investor would review each investment in their portfolio at the end of a specified period (ie. annually) to determine the gain or loss of each fund during the period. If there's a gain in one or more of the funds, you may want to consider selling a portion of the fund(s) to lock-in the gain. If there's a loss at the end of the period, you would hold the investments until the end of the next period. Another tactic you should employ is to establish your expectations in advance. One approach is to set a minimum sale price, and another is to set a minimum percentage gain on a particular investiment. However, the objectives have to be reasonable, and you must remain committed to your pre-determined objectives - not swayed by sudden changes in the market. Finally, the greatest risk of this approach is being forced to wait years for a profit. You can allow yourself a greater period of time to allow an investment to produce a profit by maintaining an adequate sum in a stable value fund to receive distributions while riding out short-term market ups and downs.
Preparing Your Investments for Retirement
Changes to your investment allocation should be done gradually as your investment time horizon and objectives progress. Therefore, as you get closer to your planned retirement age you'll want to make certain that your investments are allocated with a greater emphasis on preserving what you have accumulated (referred to as capital preservation), and less attention to long-term growth. This means that you'll need to begin selling some of your stock and/or stock mutual funds, which are designed for long-term growth, and begin increasing your allocation to fixed-income investments, such as a bond fund and/or stable value fund.
As you prepare to begin receiving distributions from your account(s), asset allocation becomes even more crucial. To avoid selling stock funds for a loss you should try to maintain at least five years of your expected distributions in bond and stable value funds. For example, if plan to withdraw $10,000 each year, you should always have at least $50,000 in more conservative investments. Again, this will help prevent the sale of stock funds during a declining market to provide retirement income. The golden rule with stocks is: "don't invest in them if you cannot commit to a minimum five-year investment period."