12 ways to better retirement


Here are 12 things you can do in 2013 to improve your standard of living in retirement:

1. Determine and record your definitions of success and failure in retirement planning and investing. Good planning and management starts with an understanding of what constitutes success and failure from your efforts. To make the right decisions, you must know whether success means achieving a certain level of economic wealth or a certain standard of living, or some combination of the two. Does failure mean running out of money too soon, or failing to leave enough behind? Figure this out before you start to make decisions.

2. Identify your retirement resources, goals and constraints. Once you know what you’re trying to achieve and avoid, you must know what you have to work with, what you need to do and what you can’t do to make it all work. For example, if success to you means living a certain lifestyle as long as you’re alive, this will mean that certain cash flows must occur along the way. These cash flows become your goals. Your retirement income streams, investment portfolio and other assets are your resources, and the fact that you can only invest in Thrift Savings Plan funds is an example of what might be a constraint.

3. Understand how investment risk and return work and how to manage them to your advantage. Managing your portfolio for one without regard for the other is reckless. The only reason to consider any investment action is for its potential to improve the risk and return characteristic — the risk-adjusted expected return — for the portfolio as a whole.

4. Learn how to use investment diversification, the most effective way to improve your risk-adjusted expected return. Like any powerful tool, if you don’t know how to use it, you’re a threat to your own safety and the safety of those who depend on you.

5. Understand the asset classes and types and their role in portfolio diversification and concentration. Asset types are the “parts” you have to work with in building your portfolio. If you don’t have the right parts in the right quantity, you’re more likely to wind up with a monster than an efficiently operating, reliable machine of a portfolio.

6. Understand asset allocation and hedging and why they are critical to achieving your investment objectives. Continuing with the investment “machine” analogy: To build a great machine, you must know how to use the tools (asset allocation) to assemble the parts (asset types) in the right way. An asset allocation model is the schematic plan for a properly functioning portfolio. And, a good schematic plan will be designed to maximize the output of the machine while also maximizing the reliability of that output. This is accomplished through hedging of the risks inherent in each of the parts.

7. Set reasonable investment performance expectations. This applies to the portfolio as a whole and to each component. Investment expectations should be based on a sound rationale that includes historical performance and logic, not on hopes or needs. These expectations should serve as both the reason for choosing a particular asset allocation model or asset type and as a benchmark for evaluating performance through time.

8. Aggressively manage your investment costs. Know what your investment program costs and then work diligently to minimize this cost without impairing your odds for success.

9. Get rid of those actively managed investment portfolios and replace them with index funds. The securities you choose are the raw materials in your investment machine. Index funds — like the ones used by the TSP — are the most reliable, efficient and cost-effective materials you’ll find. Anything else will only reduce the all-important risk-adjusted expected return for your portfolio.

10. Account for inflation, which can seriously handicap the performance of your portfolio and its ability to support your standard of living. Like risk, it can be hard to account for, and, like risk, ignoring it can mean some unpleasant surprises later on, when a problem is too big, and time is too short, to fix.

11. Make liquidity — cash flow — a priority in your retirement planning and management. Make sure you will have the cash you need, when you need it, before you consider investing any money.

12. Organize your portfolio to be simple and efficient. Don’t believe that more complex portfolios are somehow better. Simple means less expensive and easier to understand and manage. Simpler is safer. Simpler is usually better.


About Author

Mike Miles is a Certified Financial Planner licensee and principal adviser for Variplan LLC, an independent fiduciary in Vienna, Virginia. Email your financial questions to fedexperts@federaltimes.com and view his blog at money.federaltimes.com.

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