What Should Your Portfolio Look Like After You Retire?
Saving for retirement is a process: you put away some amount every month, invest some, rinse, and repeat. You’ve likely built up a portfolio over the years full of savings, stocks, and bonds, but when the day comes that retirement is no longer something that you save for, but that you’re living, that portfolio has a different job. Does it make sense to keep it the same? It’s at least worth a second look.
The Importance of Investments
Retirement is supposed to be a time when you can spend time on the things that matter most to you. But while retiring from your job opens up your time to spend how you please, not working means not making a steady paycheck. You’re relying on your nest egg for everything from the basics—food, utilities, payments—to the fun stuff, like entertainment and travel. It’s hard to get excited about making the most of your golden years when you’re anxious about your finances.
That’s why a great retirement portfolio is so important. Without the reliable income from your working years, investments and guaranteed income sources become the only way to mitigate the steady loss of your savings. At the same time, however, retirees are often less comfortable with high-risk investments than they were when they could rely on a paycheck. So what should you do about your portfolio? How do you balance earnings and withdrawals so that you don’t have to worry about your retirement?
The 4% Rule
You’ve probably heard of the 4% rule. It’s an often-cited rule of thumb for how much you should withdraw from your retirement portfolio every year, allowing you to avoid running out of money for 30 years. With people retiring later and living longer, the ability of a retiree’s savings to sustain them through retirement is a real concern.
However, the 4% rule is also a controversial one: some experts say it’s too conservative, and your wealth will accumulate only to be passed to your beneficiaries. Others argue that it’s too much, and you’ll have a hard time paying for expenses later in life. Aside from highlighting the complexity of personal finances, all of this dialogue indicates that following a rule of thumb to the letter (or number) is actually a riskier way of managing your portfolio.
What Should You Do?
- Determine your risk capacity and risk tolerance. These are two very different concepts that, nevertheless, should both play a large part in reevaluating your retirement portfolio. Risk capacity refers to your portfolio’s ability to weather risk. For example, if all or most of your annual spending is covered by guaranteed income sources, such as Social Security benefits and annuities, your risk capacity is relatively high. Risk tolerance, on the other hand, refers to your comfort level with risk. Are there big expenses, planned or potential, on the horizon like college, weddings, or medical problems? Are you okay with possibly losing money in a bear market? Determining your risk capacity and tolerance will help you understand whether or not your portfolio makes sense for you.
- Evaluate your asset allocation. What percentage of your portfolio is made up of savings? What about bonds, and stocks? Are those stocks high or low risk? In order to figure out what you should do with your portfolio now that you’re retired, you need to know what you’re working with. You’ll probably also want to do a net worth evaluation while you’re evaluating your retirement portfolio. Include things like your savings, home, vehicles, and valuable collectible items, then subtract any liabilities. This will help you get a full picture of your wealth and assets so that if you need to restructure your portfolio, you know everything from the start.
- Consult with a professional. Investing has a reputation for being opaque and intimidating for a reason: risk can be difficult to stomach when you’re risking something so personal. That’s why many people turn to an advisor for help. It’s a collaborative effort—you know yourself and your situation, and they know the industry and markets. Together, you can come up with a retirement portfolio and spending plan that allows you to enjoy your retirement without breaking the bank.
It’s a good idea to take a look at your retirement portfolio every time your finances undergo a significant change, and retiring is probably the most significant change you can make. With the right planning, you can feel free to do the things you want to without worrying about your finances.
So, does your portfolio need a second look? Annuity Alliance can help you connect with an advisor today to get started.