Managing Your Transition To Retirement
By David L. Wray *
Every day I am asked my opinion on how the volatility of the stock market has affected the 401(k) retirement accounts and defined contribution plan participants. My usual answer is that most plan participants as they view retirement planning, are in it for the long haul, and that fluctuation in the marketplace is a normal part of equity investing. Downturns such as the one we have faced in 2000-2002 merely gives participants an opportunity to purchase stocks at lower prices.
Thus, most participants’ long-term retirement planning prospects are not affected by market downturns. Yet, there is a specific group of workers, as part of their retirement planning blueprint, who can and have been adversely affected by a market decline: people who have been counting on living off of retirement account distributions in a just a few years and who have been aggressively invested in equities. These people, planning for retirement, can see their retirement planning objectives unexpectedly decline in a marker downturn.
Need for transitional phase of retirement planning
Workers who are five years from retirement need to implement a transition plan for their retirement plan assets. Individuals who have defined-contributionretirement account plan balances and/or IRAs should do the following five years prior to retirement in regard to their asset allocation:.
- Identify the asset allocation they would like to have at the beginning of their retirement.
- If necessary, implement a transition plan to shift their asset allocation gradually from their current asset allocation to the asset allocation that they would like to have at retirement.
Obviously, not all individuals will need to rebalance prior to retirement. For example, individuals who do not plan on taking withdrawals initially at retirement are generally in a better position to assume higher market volatility risks than individuals who are counting on having that money to meet their immediate retirement expenses.
Employees, planning for retirement, need to develop a plan for how they will allocate their retire account asset allocation for retirement well before they actually leave the workforce. This advance planning will allow them, if necessary, to gradually reallocate their investments over a period long enough to avoid the short-term volatility risks that are a normal part of equity investing.
* David L. Wray is the president of the Profit sharing/401(k) Council of America (PSCA), a national, non-profit association of companies that sponsor profit sharing and 401(k) plans for over 4 million employees. He is a nationally recognized authority on 401(k) and other defined-contribution plan issues and he has testified before a number of congressional committees and at Labor Department, Treasury Department, and Internal Revenue Service hearings. He was the 2004 Chair of the Department of Labor's ERISA Advisory Council, which advises the Secretary of Labor on benefits issues, and was a member of the Certified Financial Planner Board of Standards Advisory Board. He frequently speaks before trade groups, contributes to benefits publications and is quoted frequently in the media. He has written "Take Control With Your 401(k)" which was published by Dearborn Trade in June 2002.