Your Evolving Portfolio Mix
“In today’s insane economic environment, it’s easy to be lured into risking your savings by chasing after returns. If you’re close to retirement, keep calm and focus on your long-term objectives.” – Tim Davis
If you’re a few years from retirement, you’ve lived long enough to know there is a tradeoff between risk and reward. For example, portfolios holding more in stocks have nearly always delivered superior annual returns long-term. Yet, these same stock-heavy portfolios are more likely to experience panic-inducing short-term losses. High yields, especially in dividend stocks, can signal trouble that a company’s stock price may fall and that the company may not pay dividends. Similarly, high-yield bonds often indicate low credit quality. As we saw in previous years, many companies with low credit scores default on their bonds when the economy falters. Depending on where you are on the retirement timeline, you may not have enough time to recover from a severe market downturn. Yes, it’s normal to want income in retirement, but you must answer a critical question: “Can I afford to lose even a single dollar of my retirement savings?”
The “magic matrix” is mythical.
It would be great if some universal law governed portfolio design, a simple process that works for everyone every single time and provides you with the exact amount you need so you won’t run out of cash.
Unfortunately, there is no such law.
Instead, creating and balancing a retirement portfolio is a deeply personal exercise. The same tools and methodologies you used to accumulate wealth won’t work when the time comes to live off that money. That’s why partnering with a financial professional specializing in income distribution is critical. You and your retirement income specialist will take several actions to ensure you have sufficient retirement income. These steps might include:
- Get an accurate picture of your true risk tolerance.
- Look at your health and future medical expenses.
- Determine what kind of lifestyle you want when you stop working.
- Add all existing and future income sources, including inheritances, Social Security, and other income.
- Clarify your money goals, including whether you want to leave a legacy for your family.
- Maximize your Social Security by using a Claiming Guide.
- Identify ways to create moderate gains without exposing wealth to too much risk.
- Consider contracts from insurance companies that can guarantee income for a lifetime.
As you create your spend-down strategy and periodically rebalance your portfolio to achieve your financial goals, you must avoid the temptation to chase after high yields and develop a long-term mindset. Ask yourself if losing principal to maximize your income is worth the risk.
Summing it up: While there is no such thing as a reward without risk, there are safer alternatives to investing in high-yield stocks and bonds. High-quality, safe money products exist that can help you create streams of reliable, predictable income. Having at least one secure money stream in addition to Social Security could make it more comfortable for you to have more risk in other areas of your portfolio.