Managing The Transition - Can't Wait Until Age 64 Years And 11 Months

Every day I am asked how the recent volatility of the stock market has affected the 401(k) plan participants. My answer is most plan participants are in it for the long haul where dollar cost averaging smoothes volatility and fluctuation in the marketplace is a normal part of equity investing. Thus, most participants’ long-term retirement prospects need not be adversely affected by market downturns.

Yet, there is a specific group of workers who can and have been adversely affected by a market decline: people who have been counting on living off of retirement plan distributions in a just a few years and who have been aggressively invested in equities. These people can see their retirement prospects unexpectedly decline in a market downturn.

Need for transitional phase retirement planning.
Workers should not wait. They should start planning for retirement at least five years before they are handed gold watches. Doing so puts them in control of their future and frees them from the tyranny of short term market swings. One part of that process is to develop and implement a transition plan for their plan assets. Specifically they should:

• Do what’s necessary to determine the asset allocation they would like to have at the beginning of their retirement.
• Develop and implement a transition plan to gradually shift from the allocation of their current assets to their planned asset allocation goal.

Of course, 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.

But everyone needs to start the retirement planning process well before they retire. This advance planning will allow, if necessary, a gradual reallocate of investments over a period long enough to avoid the short-term volatility risks that are a normal part of equity investing.