Susan Dziubinski: Hi, I’m Susan Dziubinski from Morningstar. We’re almost halfway through a very volatile year, and Morningstar’s Christine Benz thinks it’s a good time to make sure that you have a true north for your investment in retirement plans. She is here with me today to discuss how to create policy statements.

Hi, Christine. Nice to see you.

Christine Benz: Hi, Susan. Good to see you, too.

Dziubinski: You’ve created a to-do list of money tasks for us to take on month-by-month through 2022. And on the docket for June is creating investment and retirement policy statements. So, let’s start with the investment policy statement: What is it, and how can this help keep you on track, maybe perhaps, especially during volatile times like we’ve been experiencing?

Benz: Right. The investment policy statement would be the more familiar of these two statements. But basically, it’s an outline of what your goals are, what sort of investments you’ll use to help achieve those goals, how you’ll select those investments, how they’ll change over time. And the virtue of having this document and committing it to writing or committing it to some sort of an electronic document is that it does, I think, serve as a check against making actions at what in hindsight might turn out to be an inopportune time. So, if right now you’re a little bit worried about what you’re seeing with your portfolio value, if you refer to that investment policy statement and see, well, you know, basically, I’m on track. My asset allocation is still on track. The investments that I made are still a fit with what I was hoping to achieve, you’d know not to make any changes. I think it is a good check on what can sometimes be our own worst impulses.

Dziubinski: Now, you’ve actually created an investment policy statement that users can access on Morningstar.com. What are some of the key items that belong on one of these statements?

Benz: Well, I think, at the very top would be your goal, and I like the idea of having an investment policy statement, a separate investment policy statement for separate goals. So, maybe you’ve got retirement at the top of the heap, but separately, you’re also building a college fund, maybe you’re also saving for some sort of home remodeling, so a shorter-term goal. I like the idea of having separate policy statements, using a healthy form of mental accounting to delineate what you’re trying to achieve with each of those goals, spell out your asset-allocation framework for each of those goals, spell out what you’re looking for in specific investments, and importantly, also spelling out what you will look at when you’re monitoring, so what will be red flags to make changes. I think ideally, too, you would let the document be a little bit flexible so that it can live and breathe. Rather than saying my asset allocation for retirement is 80/20 and then having to go in and revisit that every year, maybe say I expect it will be 80/20 when I’m in my 30s; it will move to 70/30 when I’m in my 40s and so on, that you get that right out there in the investment policy statement. But less is more when it comes to these investment policy statements. I sometimes encounter investors who have built these multipage documents. You probably don’t need something super-complicated. You want something quite short and to the point.

Dziubinski: And let’s talk a little bit about those investors who perhaps already have an investment policy statement. What should they be looking for to make sure that that policy statement still suits their current situation?

Benz: You’d want to check that the goal is still in place, the target date for the goal is still in place, that the asset-allocation plan that you had for that goal still makes sense. But from there I think an important thing that might change would be your attitude about investments. So, it might be that earlier in your investment career you’re someone who really enjoyed picking individual stocks and then 30 years later, you realize, “Well, really? I think index funds get this done just as well and do so at a low cost and do so with a lot less hands-on oversight.” So, you might want to tweak those variables as well, whereas your early IPS may have spelled out, “Well, I’m looking for these specific criteria in individual stocks,” maybe the current document is more reflective of where you are today.

Dziubinski: And pivoting to retirement, you’ve been an advocate for a while and have talked about—and this is less talked about—the idea of also having what’s called a retirement policy statement, specifically for those investors who are nearing retirement or in retirement. So, tell us about what a retirement policy statement is, what it includes, and why we should be thinking about having one.

Benz: Right. This is a companion to the investment policy statement. So, I think everyone needs investment policy statements. As you get close to drawing upon your portfolio, I think a retirement policy statement can be a really nice complement to the IPS. And basically, it’s spelling out your retirement date and, importantly, how you expect to extract cash flow from your portfolio, how that will interact with Social Security, so when you might start taking Social Security. You would commit that to this document. It would talk about the withdrawal rate that you plan to use from your portfolio. Also, how you plan to generate income. Will you use an income-centric approach? Many retirees like to do that. Or will you use more, sort of, a total return and rebalancing approach? And here, I think you should also say, “What will be my approach to pulling income from my portfolios?” Is it something that I’ll do annually or will I try to generate income quarterly or even monthly? I think you would document all of that in the RPS, and we’ve created a template for this as well.

Dziubinski: And then, lastly, Christine, you’ve also talked a little bit about how these policy statements can be useful tools when it comes to succession planning. Talk a little bit about that.

Benz: Right. I think they can be great starting points if you are thinking about your investment plan and your retirement plan, and you want to bring others in your life up to speed on what it is you’re doing. I think these tools can be really invaluable. I’ve encountered so many avid, engaged individual investors who are the hands-on person in their household, but they have communicated a little less with their spouse or other family members. You need to bring them at least up to speed on the basics of your plan, and I do think the documents can come in handy there for spelling out, “Well, here’s what I’ve been doing.” It can also be, I think, a valuable tool if you’ve decided that you want to turn it all over to a financial advisor. It’s a great way to bring him or her up to speed on whatever program you’ve been using to manage your investments in your retirement plan.

Dziubinski: Christine, thanks for your time today and for walking us through our financial to-dos for June. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Read more:

How to Create an Investment Policy Statement
How to Create a Retirement Policy Statement