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A Financial To-Do List for June

Make a blueprint of your financial plan and keep it on track with investment and retirement policy statements.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Morningstar's director of personal finance Christine Benz has created a month-by-month financial to-do list for 2021. She is here today to talk with us about our to-dos for June, which are creating policy statements for our investment and retirement plans.

Christine, thank you for joining us today.

Christine Benz: Susan, it's great to see you.

Dziubinski: You are a big advocate of creating investment and retirement policy statements. What's the value in doing so?

Benz: I really think there are three key benefits. The first is that having a policy statement ensures that you have a plan. So, if you've gone to the bother of thinking through what your savings rate should be, what your asset allocation should be, and so forth, that means that you have a plan, and you are set and ready to make these documents. That's the first thing.

The second thing is that having these policy statements can help you keep your plan on track. So, if you have an investment policy statement, you can periodically compare your asset allocation to, say, your target asset allocation. With your retirement policy statement, you can compare your real withdrawal rate relative to whatever withdrawal rate you set out in the retirement policy statement. Keeping your plan on track.

And then, the third benefit is really one that is in the realm of succession planning. If someone needs to manage your financial affairs for you for a short while, or if something should happen to you, it's kind of a blueprint for how you were doing things as you were doing them. So, it might be a financial advisor who needs to take over or your spouse or an adult child. But whoever it is will have some sort of an overview of whatever your plan was for your investment mix as well as for your retirement plan.

Dziubinski: Let's start by talking about the investment policy statement. What are some of the key components of a successful investment policy statement?

Benz: I think you don't need to overcomplicate it. You want to think about the basics. So, if you are in accumulation mode, you'd want to document your savings rate, what types of vehicles that you are contributing to. You'd certainly want to include something about your asset allocation, your target asset allocation, as well as how that might change over time as you get closer to your goal date. You'd want to include a little bit of detail about how you are selecting investments and what sort of threshold you are holding your investments to. And finally, I think you'd include some detail about how to monitor that portfolio: when will you make changes, when will you decide if it's time to add something new? Those are the key things I would include in an investment policy statement. And by the way, Susan, we have created templates that people can use. You don't need to create these from scratch. We have created easy-to-use templates that you could print out and use and populate with your own information.

Dziubinski: And you say that it's important with an investment policy statement that you don't just create it and then stick it in a drawer somewhere. The point of an investment policy statement, at least one of the points of it, is to use it on an ongoing basis. How do you do that?

Benz: Right. I think a good once-annual review is plenty for most investors where they are taking a look at their plan currently, taking a look at their investments currently, and comparing that to what's in their investment policy statement. The contents of the portfolio may have shifted around and variably that will happen, and you may need to do some trimming on your equities, for example. Your own situation may have changed. Maybe early in your accumulator career you were entirely focused on retirement, but then you had a child, and now college savings is part of your investment plan as well. So, your own circumstances might change as well and necessitate a change to the plan and a change to the policy. But definitely think of this as a document that you will use to monitor your plan and monitor how you are doing toward achieving your financial goals.

Dziubinski: Christine, you just mentioned that having a child is a life event that might cause you to make a change to your investment policy statement. What are some other examples of times where investors might want to take a second look and update that?

Benz: Certainly, asset allocation would be another area where making changes over time would be appropriate. Perhaps you'd even want to lay that out in your investment policy statement that perhaps you are starting with an 80/20 asset allocation, 80% in equities, 20% in fixed income and other assets, and then gradually moving to, say, a 60/40 or a 50/50 blend as retirement draws close. But if you haven't put that in, you may want to change your asset allocation. You may want to change the parameters around investments as your views evolve. So, a lot of investors have gravitated away from active funds, for example, to index products. You'd want to update your investment policy statement accordingly as your own viewpoints of what constitutes a good investment has changed.

Dziubinski: And let's pivot over now to a retirement policy statement. You don't hear as much talk about these particular types of documents. Tell us a little bit about what it is, what's in it, and why you think it's important.

Benz: Yeah, I really love this idea and here, too, we have created a template that people can use to kind of get them thinking about what the main components of a retirement policy statement might be. But at the top of the list would be your anticipated retirement date, what other nonportfolio income sources you might be bringing into retirement, whether Social Security or a pension, and how much income you expect them to supply on a monthly or an annual basis. And then you'd want to get into a bit of detail about your approach to your portfolio, so your withdrawal rate, your target asset allocation for your in-retirement portfolio, how you'll draw upon that portfolio--will you draw from cash holdings, will you draw from dividends, will you use just rebalancing? You'd want to document all of that in the retirement policy statement. You may want to include a little bit of detail about your Social Security start date, when you expect to begin claiming Social Security, when your spouse, if you have one, will claim Social Security. Those are some of the key things that would go into an RPS. I see this as working hand in hand with an investment policy statement. So, you would want to still have an IPS even when you are retired, but the retirement policy statement would be complementary.

Dziubinski: How would someone use a retirement policy statement on an ongoing basis?

Benz: Well, here again, I think that once-annual review can be incredibly powerful, and it can be just enough. You probably don't want to monitor your plan too frequently. So, get in there annually. Check up on your withdrawal rate over the past year. Check in on your asset allocation. Check in on the main constituents of your retirement plan and make sure that what you are doing is in sync with your plan, and if it's not and we might naturally have higher spending years in retirement, for example, you can course correct in the year ahead or in the years ahead. If you've overspent in the past year, you may find that you can tighten your belt a little bit and make up for that. So, that's the nice thing that you can reflect on what has happened over the past year and make adjustments to make your plan look better going forward.

Dziubinski: And lastly, Christine, you think these documents should be as clear and as jargon-free as possible? Why do you think that's important?

Benz: As I said at the outset, I think that this type of document can be very valuable to your loved ones if they need to pick up your plan and figure out how you were managing it. So, I do think that it helps to make it as plainspoken as you can possibly do. You don't need to speak "investment consultant." You'd want to put it in plain English. Also, if you have a spouse or another trusted loved one, who you expect might be charged with picking up your plan and taking care of it if something were to happen to you, show it to him or her and see if the information is digestible, if they understand it. If not, go back and adjust it until it is. I think that that's a great check to make sure that the plan that you've created isn't just understandable to you, it's understandable to other people as well.

Dziubinski: Well, Christine, thank you so much for your time today and for all the work you've done laying out a great road map for us to accomplish some financial jobs in 2021. We appreciate it.

Benz: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.