Are You Being too Conservative with Your Retirement Portfolio?

By GARY LISKA | Special to the Palisadian-Post

Fifty years ago, conventional wisdom held that the nearer you were to retirement age, the more conservative you should become with your investment portfolio—gradually moving more and more assets out of stocks and into fixed income.

Considering that the average retirement lasted about 10 to 15 years and most people had a healthy employer pension to augment their guaranteed income from Social Security, it was reasonable guidance.

Today, however, those preparing to leave the workforce need to plan for a retirement that could last 25 to 30 years (or longer). Essentially, you might need to fund a retirement that lasts twice as long as your parents’ generation, yet fewer than 16% of workers are still able to rely on income from a company pension. The bottom line is that your savings will need to do a lot more of the heavy lifting.

You still may want to be conservative with the assets you’re going to need to liquidate for income during the earlier years of retirement. This is because poor portfolio returns during the early years of retirement can dramatically reduce the ability of your savings to last (concerns that can be mitigated by adding additional sources of guaranteed income).

But there’s little need to avoid investing in stocks with assets you won’t need to access for another decade or longer. Even in the event of a significant market downturn, there should be sufficient time for equities to recover their value before you need to draw them down for income.

Five keys to retirement income planning:

• Don’t stop pursuing growth: Rather than shifting completely to bonds and CDs, commit to keeping a healthy allocation of stocks in your portfolio to take advantage of their inflation-beating growth potential.
• Stay diversified: Converting your portfolio to a single asset class like bonds makes you more vulnerable if that asset class trends down. Typically, different asset classes (e.g., stocks and bonds) move in opposite directions. So, maintaining a mix of investment types can help smooth out market fluctuations.
• Consider your risk tolerance: Make sure your portfolio reflects your risk appetite. If volatile markets are going to cause you to lose sleep, maybe you’ll need to allocate more of your portfolio to high-quality bonds and U.S. Treasuries. But know that you’ll likely have to cut back on your spending to compensate for the slower growth from those more conservative investments.
• Seek out professional guidance: Target date funds can help take some of the work out of shifting your allocation—automatically becoming gradually more conservative as your retirement date nears. But working with a trusted advisor can provide you with even greater control, and the ability to more accurately build a portfolio that reflects your specific needs.
• Avoid spending too much too fast: After a lifetime of saving, it’s natural to want to splurge a bit. But too many new retirees enter retirement with unrealistic spending expectations. Nearly one in three (31%) think they can spend 10% or more of their savings annually—a rate that would wipe out most retirement accounts within a decade. Your trusted advisor can help you determine a sustainable rate of retirement spending (typically around 4%) based on your goals.

Whether retirement is right around the corner or a decade away, the sooner you begin income planning, the more options and opportunities you’ll have to explore. By employing a thoughtful, structured approach, you and your financial advisor will be able to align income and expenses (including out-of-pocket healthcare costs), identify any anticipated income shortfalls and implement solutions to help reduce or eliminate any gaps.

Gary K. Liska may be reached at 310-712-2323 or seia.com.