Portfolio Construction For Middle-Aged Folks Attempting To Plan For Retirement
Well, the title says it all — Recently put together a set of tips for my parents and figured they may be useful for the world. If it’s helpful happy to keep writing more! Good luck to all.
Here are the steps I would take as you sit down to determine a retirement investment strategy.
Fear Setting
Do this exercise to really get a good grip on what your worst case scenario is. Many times the downside in our minds is MUCH different than the downside in reality — downsides are *rarely* uncapped and acknowledging that is important to free yourself to be able to think of a path FORWARD instead of remaining stagnant.
See this link for more: https://tim.blog/2017/05/15/fear-setting/
Build Your Personal Balance Sheet
Before you can create a strategy you need to have a clear idea where you stand asset vs. liability wise. You might already have this. But we need a clear picture of your cash flows before we begin any sort of strategic discussion. Create a double ledger balance sheet listing any and all assets and any and ALL liabilities.
See this link for more: https://familybudgetexpert.com/personal-balance-sheet/
Rank Your Assets By Liquidity
Next we need to know what room we have to maneuver. Take the assets in your balance sheet and rank them on a list from most to least liquid — the most liquid of course being cash, and least liquid being assets without clear and available markets like private company stock.
Remove Your Lifelines
On your ranking, choose your lifeline assets — the ones that will serve as a bedrock and remove them from the equation. We don’t even want to CONSIDER them when planning and understanding what room you have to play with. This is the peace of mind you need to be able to craft a strategy that moves forward and isn’t based in fear.
Establish Your Goal
If you don’t know where you’re going it doesn’t matter which way you go. There are a few key aspects to any financial goal: Specific, Time-based (and the other aspects of a SMART goal, but these two are the most important). Any investment has a time horizon and being clear on WHERE you need to get by WHEN is the crucial next step.
Generally aiming to get to a level of base liquid net worth which throws off investment income at a rate that sustains your lifestyle is an ideal goal. Check out this blog post for an interesting way of thinking about this:
https://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/
Determine Required IRR
In the investment world, almost all investments are evaluated based on their IRR — Internal Rate of Return. This is their compounded return, adjusted for risk and inflation. You need to calculate, based on a baseline inflation rate and risk-free rate (30-yr. Treasury rate) what the required IRR is on your assets for you to be able to hit your GOAL in the allotted TIME.
This is why a TARGET and a TIMELINE are so important. You can work your way backwards by simply adjusting the compound growth formula to take inflation into account and determine the required Yearly RoR on your initial investment.
I would also take a few scenarios: (1) Only investing your most liquid assets, (2) liquidating some mid-tier assets and (3) liquidating all assets. This will give you a range of needed IRRs that you can evaluate for REALISM.
—
These are the immediate next steps I would take and which should set you up to have much more intelligent conversations around retirement, goals and investment strategy. Just remember that individual investments DON’T MATTER, what matters is the overall risk-adjusted rate of return on your portfolio as a WHOLE over time. Individual investments are a product feature, the portfolio is your COMPANY.
Build a company, not a feature.