How to Plan Your Retirement Portfolio with Zero Savings

Does planning for retirement at a young age seem like a waste of time? Of course, that depends on what you consider young. Seventeen is young…while 40, is, well..."young-ish." Either way it makes sense to start saving and investing AS YOUNG AS POSSIBLE once you decide on a practical investment strategy.

Yeah, I know...there's lots of reasons why it's hard to put that money aside. You’re new on the job. You just upgraded your apartment or bought a house. You had to have that new car. And so forth. In other words: You have no extra money to save and invest. Despite these youthful excuses, there's always something you can be doing to, at the very least, develop the framework for a “currently unfunded” retirement portfolio.

Follow these FIVE steps to start planning your retirement investment portfolio (NOW):

The first thing to figure out is the projected number of years you are likely to spend in retirement. Of course, no one can answer this question with any certainty, so let’s simply speculate that it could be as long as 25 years.

Next, determine what annual percentage you are likely to withdraw from your retirement funds. Among the “withdrawal rate” prognosticators, many use a so-called burn rate of around 4% per annum as a most likely means of avoiding premature exhaustion of a retirement fund. While generally following the 4% burn rate rule, be conservative in its use. In short, don’t assume large drawdowns early in retirement, creating the possibility that your portfolio might not recover from an unexpected Bear Market or an unforeseen personal health setback, both of which are difficult to predict. So, let’s keep it simple. Assume that you’ll spend 25 years in retirement and that you’ll spend as much in retirement annually as you did before retirement. Thus, to remain independent of outside financial assistance in old age, you’ll need sources of funds with purchasing power equal to 25X the annual amount you now spend.

The sooner you figure out how much you'll need to amass to establish a comfortable retirement portfolio, the sooner you'll adjust your current rate of savings that, when added to other annual sources of income, will aid you in achieving your desired financial objective. Your burn rate of 3%...4%...5%...is an important part of developing your long-range savings plan. The lower the burn rate factor, the less aggressive you will need to be with your return on asset assumptions. And a lower burn rate will allow you to look at a more aggressive approach to investing. Of course, the opposite is true assuming a higher burn rate.

Figure out what your retirement income sources will be - or could be. One will likely be the resultant lump sum of those annual 401(k) or IRA savings compounded over the course of your working life. Hopefully, another will be a very safe, life-long, inflation-adjusted monthly social security payment. Other sources might be a corporate pension plan and/or an annuity, the latter purchased with bonus or inherited money.

More than likely, cash flow from pensions and annuities will not be inflation-adjusted and should be viewed much like bond income, each of which loses purchasing power over time. Hopefully, the sum total of these accumulations of capital, including related dividends and capital gains, will add up to your retirement objective…the financial independence you strive for when initially developing a retirement portfolio.

Prepare yourself to face financial risks that will most likely affect your retirement portfolio - and possibly your peace of mind, like market volatility. The way I have weathered various storms is by practicing my "PDQ Principles,"- Patience, Diversification, and Quality. They’re each important on their own, but remaining patient will serve you best during retirement years. For example, in a Bear Market, don’t join the thundering herd of scared investors and stampede over the cliff (ie. sell your investments at a loss).

Because most young investors have not experienced a Bear Market, experiencing one for the first time can induce significant stress and can quickly expose your tolerance for risk. Learn from these experiences because past behavior during such times will provide good indicators of how you might behave during the next bellowing Bear. As retirement approaches, investors with a demonstrated low tolerance for risk should invest more conservatively. And for those with a higher risk tolerance, remember that although there are bargains aplenty during Bear Markets, you will probably have less…or no…new money to invest, so proceed with caution. Losses at later stages in life are harder to recover on a timely basis.

Always…always…keep inflation in mind when investing your savings. Over time, even a low rate of inflation can dramatically erode the purchasing power of your stock, bond and pension investments. Target-Date Funds come to mind as a way to reduce investment risk through diversification. As one approaches retirement, a more rational ratio of bonds to equities is always in order.

Keep Calm and Pass it On

As your retirement years roll by, and you become increasingly confident that your savings exceed your needs, remain cautious. A future that might involve a couple more decades in retirement is hard to accurately predict. To unexpectedly exhaust retirement funds prematurely would be a terrible ending to years of careful planning. Still, if you have both a high risk tolerance and ample financial wherewithal later in retirement, you might dial up the risk exposure a bit. Particularly, if you have a low burn rate and several “non-portfolio” sources of income like annuities, a pension, Social Security, etc. that cover most or all normal spending.

If you’re sitting on more than you need, ask yourself, what do I plan to do with it? Would the residue significantly change the lives of my loved ones right now? And how would it make me feel to share some of it? Just remember, the downside of any unanticipated “worst outcomes” can be far more detrimental than the benefit of the best outcomes. Along the way, if adversity appears, be willing to dial back the risk even if it means you will end up with a smaller portfolio to leave to the kids and grandkids.

An investor who has both the capacity and tolerance for taking more risk might consider giving surplus assets to children and grandchildren sooner rather than later, which allows the giver to enjoy witnessing the impact of such gifts.