As advisors, we get asked this seemingly logical question all the time: “should my investments be more conservative as I get closer to my retirement date?” After all, you’re about to say goodbye to your working years, so playing it safe is a good idea, right? At first glance it may seem like a reasonable assumption, but this article will explain why it’s actually a much more complicated situation. Shifting investments into cash and bonds may not be the best idea given how complex it has become to navigate a long and healthy retirement.
At HighPoint Advisors, LLC in Syracuse, NY, we specialize in helping individuals and families make informed financial decisions as they prepare for life’s milestones, including retirement. For years, we’ve worked with clients locally and across the country, offering tailored guidance in areas such as wealth management, estate planning, long-term care planning, and more.
Retirement Is a Milestone, Not the End of the Road
Of course, we all know life continues after you retire. Longer life expectancies mean that your retirement years could last multiple decades – which could potentially be an even longer period than your working years! The instinct to protect your portfolio is understandable, but shifting investments too early to be too conservative could put you at risk of running out of money. A well-crafted plan involves managing risk, not eliminating it.
Over a period that could last 20, 30, or maybe even 40 years, you must expect that numerous unforeseen circumstances will come your way. Some examples include market volatility, health care changes, inflation, family updates, major changes in public policy, and evolving personal goals. This means that your investments will need to continue to grow over time – not only to preserve capital, but also so that you don’t outlive your money.
Managing Risk
A portfolio that’s too conservative may struggle to maintain your purchasing power over time, so keeping growth assets, like stocks, in the mix will help to preserve your long-term financial health. A proper asset allocation is required to support decades of portfolio withdrawals that may be needed to supplement other income sources in retirement.
A popular retirement allocation has been the classic 60/40 approach – 60% in growth assets like stocks, and 40% in safer assets like bonds and cash. This approach has held up much better than simply getting out of the markets and parking your money in traditionally less risky assets like cash alternatives. Properly managing risk can be the key to affording the retirement lifestyle you planned for.
Your Spending Plan
An alternative way to think about how conservative your investments should be is to think about what income needs you’ll have in retirement. Investing always involves contemplating your time horizon, and in this case you’ll want to consider your withdrawal time horizon. That is to say, how long you anticipate you’ll need to draw from your portfolio. The longer the horizon, the more growth investments you’ll want to balance with stable parts of the portfolio.
Keep in mind that your spending needs will not be the same consistent amount throughout your entire retirement phase. You will spend different amounts on different things early in retirement than you will much later in life. Early retirement may be full of travel, entertainment, and hobbies, but as time goes on you may realize that other costs such as healthcare could play a larger role in your expenses. Most retirees will see spending habits stabilize during mid-retirement, but change is inevitable. Prescriptions and long-term care costs may emerge as a more significant part of your retirement budget later in life, so making sure your money goes the distance is critical.
This illustrates the importance of having flexibility in your portfolio. Retirement income planning is not a one-size-fits-all task. Your spending needs over your time horizon will determine what level of risk you need to have in your portfolio.
Expect the Unexpected
Your overall retirement income portfolio should be as bullet-proof as possible. To make sure the little things don’t knock you off course, check that you have a solid foundation. This may include stable fixed income sources such as Social Security income, pensions, and/or annuities, if applicable. Those are typically monthly payments that you cannot outlive. Above and beyond your foundation, you’ll need to have some flexibility in the form of income generated from your investment portfolio. Regular withdrawals from your portfolio will serve to provide needed income to satisfy your retirement budget.
Your overall investment portfolio should include an emergency fund to provide funds in a crisis. This will help you avoid dipping into other parts of your savings that will be needed later down the road for other purposes. Barring any crisis, your more conservative investments should be used to fund near-term expenses while your more aggressive investments seek growth for future needs. Rebalancing your portfolio periodically will help ensure the investment mix stays appropriate for your needs.
Diversify: Be Flexible
Portfolio diversification is important because it maintains a blend of asset classes to balance risk and return. This is especially useful when thinking about the need to recover from a downturn in the markets, and the fact that keeping some equity exposure will help that recovery. Mixing asset classes will also help to reduce volatility during the ups and downs of market cycles.
Market volatility works both ways – up and down – and not all investment types move in the same direction (nor should they). We talked above about traditional fixed income sources that serve as your income foundation, but your investment portfolio needs to pull its weight too. Stocks and alternative assets can support long-term growth of capital. Bonds can provide stability and cash flows along the way. Cash reserves can provide needed short-term liquidity to meet spending needs. When you put it all together the result can be a solid yet adaptable plan that should align with your retirement goals.
Plan with HighPoint Advisors, LLC
Shifting to a more conservative investment strategy as you approach retirement can make sense, but only in the context of a comprehensive roadmap for your retirement. Instead of reducing risk across the board, consider how your assets and income sources should work together to meet your needs over the next 20 or more years.
A good financial advisor will help you build a retirement income strategy that coordinates all these elements into a clear and cohesive plan. If you’re nearing retirement, now is the time to sit down with one of our advisors and create strategy that reflects what you want for your retirement lifestyle. At HighPoint Advisors, LLC, our advisors have the experience and credentials to know what pitfalls to avoid, and how to customize a portfolio just for you.
Contact us today to tell us what you want your retirement to look like!
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Asset allocation does not ensure a profit or protect against a loss.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.