Why you need a retirement policy statement

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. If you're approaching retirement, a retirement policy statement might be something that's worthwhile putting together. I'm here with Christine Benz, she is our director of personal finance, to talk about what it is and how to make one.

Christine, thanks for joining me.

Christine Benz: Jeremy, great to be here.

Glaser: Today we are going to talk about this retirement policy statement. You also, in the past, talked about the investment policy statement. What's the value of really putting pen to paper and creating these statements?

Benz: I think that there are a couple of key benefits to policy statements, whether for your investment program or for your retirement de-cumulation program. One of the key benefits in my eyes is simply that it gives you a chance to articulate your strategy. You aren't embarking on retirement or you aren't putting together an investment portfolio without a real plan. The IPS or the retirement policy statement helps ensure that you have a plan, that you have a strategy and you have taken time to document it.

Another key benefit in my view is that having these policy statements helps ensure discipline. If you have spelled out in your retirement policy statement, for example, that you are sticking to a 4% withdrawal rate system--well, the fact that you've committed that to paper is probably going to keep you on track with that system a little more than would be the case if you hadn't laid out any documentation. The same would go for crafting an asset allocation framework and spelling it out in your investment policy statement. The fact that you've written down that you plan to stick with a 75% equity allocation, 25% bond allocation will tend to keep you on board with that asset allocation program a little more. Those are two key benefits.

The final benefit that I see to having these policy statements is simply to give your loved ones the ability to get a quick and easy glance at what it is you are doing in terms of how you are approaching your investment program or how you are approaching your retirement plan.

Glaser: What sort of things should go into the statement? You mentioned a few earlier. But what would the full thing look like?

Benz: Looking specifically at the retirement policy statement, obviously, you would want to have the basic outlines of your retirement program--when you plan to retire, when your spouse plans to retire; the key assets that you will be bringing into retirement; you want to articulate your anticipated income needs in retirement; how much of those income needs will be coming from certain sources of income like Social Security, like a pension, like an annuity. Then you will want to articulate your specific withdrawal plan for that portfolio. Not only how much you plan to take out of your portfolio but also how you plan to actually extract that cash flow. Will you focus strictly on whatever current income your portfolio kicks off, or will you reinvest all of your income back into the portfolio and use a pure total return approach where you are just withdrawing rebalancing proceeds. You are really spelling out the nitty-gritty of your spending plan and how you are extracting that cash flow from the portfolio.

Glaser: How does this retirement policy statement interact with your investment policy statement? Does it supplant it? Do they live side by side? How would you think about that?

Benz: I see the two as very much living side by side. Even though you maybe retired, you still are managing an investment portfolio and the same types of considerations that influence your decision-making when you are in savings mode will still be in play when you are retired. In the investment policy statement, you are getting into what's my asset allocation that I'd like to maintain; what are the investment criteria that I'm looking for when I pick investments; how do I decide when it's time to sell? All of those considerations are getting spelled out in the investment policy statement, and they are still important in retirement.

The retirement policy statement, I would say, is a little bit more holistic in that it considers not just the investment portfolio but the nonportfolio assets as well--things like Social Security and your approach to it. Those are the types of things that would get documented in the retirement policy statement. So, it's de-cumulation-focused. It's a little less focused on the specifics of managing that investment portfolio on an ongoing basis.

Glaser: You've created a downloadable template for this. It's available on Morningstar.com. But if you did want to have some customization, what are some of the areas that you might consider adding on?

Benz: A couple of key areas come to mind. One would be for people who are adherence to the Bucket approach that I write a lot about for Morningstar.com. The basic idea would be that if you wanted to put a little appendix on your retirement policy statement that gets into the specifics of: here are buckets, here's the general character of the investments that I intend to put within each of these buckets, that would be one way to customize a retirement policy statement.

Another idea that comes to mind is--and this is a really common situation, where you have two spouses where one is the very engaged investor and maybe you've got another spouse who is not that engaged or maybe not even that knowledgeable about investments--you might want to lay out a quick and dirty retirement policy statement, maybe something a little easier to understand, more condensed, easier to skim that gets into the broad outlines of your retirement de-cumulation plan. I think that can be very valuable if you happen to be part of one of those couples where you have a spouse who is just not that into it.

Glaser: Christine, thank you.

Benz: Thank you, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.