Pre­pare ahead of time for re­tire­ment

Lodi News-Sentinel - - Business - CHRIS OLSEN My hus­band and I plan to re­tire in two years. Our port­fo­lio is mostly in stocks. Should we re­duce our risk now, or wait un­til we are re­tired? Christo­pher J Olsen is a Cer­ti­fied Fi­nan­cial Plan­ner and a Re­tire­ment In­come Cer­ti­fied Pro­fes­sional.

Think about this anal­ogy: When an air­plane is prepar­ing to land, it doesn’t de­scend 30,000 feet in a mat­ter of sec­onds.

Rather, it hap­pens grad­u­ally. The pi­lot ad­justs to the land­scape and weather con­di­tions to as­sure a soft land­ing.

In the years lead­ing up to re­tire­ment, you should be­gin to treat your in­vest­ment port­fo­lio in a sim­i­lar man­ner.

Pre­pare ahead of time to pro­tect your as­sets and ad­just as dic­tated by mar­ket and eco­nomic con­di­tions to help as­sure a soft land­ing in re­tire­ment.

Ad­just­ing your port­fo­lio means tak­ing steps to “down­shift” as re­tire­ment nears, re­duc­ing some of the risks that may ex­ist in your as­set mix.

While you were fo­cused on build­ing wealth in the years you ac­cu­mu­lated sav­ings for re­tire­ment, your fo­cus should change as you ap­proach the end of your work­ing years. It’s im­por­tant to pro­tect the wealth you’ve worked hard to build and po­si­tion your port­fo­lio to gen­er­ate your re­tire­ment pay­check.

Deal­ing with un­pre­dictabil­ity

Money in­vested in as­sets that vary in value, in­clud­ing stocks and bonds, are sub­ject to pe­ri­odic fluc­tu­a­tions. In prior years, you may have had time to ride out any mar­ket tur­bu­lence and over­come short-term losses once mar­kets re­cov­ered.

If you wait un­til re­tire­ment to ad­just your port­fo­lio, you may be sur­prised by an un­timely mar­ket down­turn. This un­pre­dictabil­ity could re­sult in a “hard land­ing” for your port­fo­lio, leav­ing you with less money in re­tire­ment as com­pared to your plans.

For ex­am­ple, a cou­ple with $1,000,000 saved for re­tire­ment may plan to with­draw $40,000 each year from that ac­count, (as­sum­ing they with­draw 4 per­cent of the prin­ci­pal value an­nu­ally to sus­tain 25 years in re­tire­ment).

If the money was all in­vested in stocks and the port­fo­lio sus­tained a 25 per­cent de­cline just prior to re­tire­ment, the value would drop to $750,000, leav­ing the cou­ple with $30,000 a year. By con­trast, if they po­si­tioned the port­fo­lio more strate­gi­cally prior to re­tire­ment, they may have pro­tected them­selves, at least in part, from the mar­ket’s down­turn.

A grad­ual process

The process of shift­ing from ac­cu­mu­lat­ing wealth to an in­come-gen­er­a­tion fo­cus in your port­fo­lio should hap­pen over time.

One ap­proach is to grad­u­ally re­duce your po­si­tions in as­sets that are sub­ject to greater mar­ket volatil­ity in the years lead­ing up to re­tire­ment. For ex­am­ple, that may mean re­duc­ing your port­fo­lio’s ex­po­sure to stocks while in­creas­ing po­si­tions in fixed in­come in­vest­ments.

How­ever, not all your money needs to be moved out of stocks, even in re­tire­ment. Equities his­tor­i­cally have of­fered more growth po­ten­tial than many other types of in­vest­ments.

Given to­day’s long life ex­pectan­cies, you want to be pre­pared for the like­li­hood that liv­ing costs will be higher 20 or 30 years from the time you be­gin re­tire­ment. For this rea­son, stocks may still make sense for your sit­u­a­tion.

You may want to re­duce your em­pha­sis on in­vest­ments that seek to max­i­mize cap­i­tal ap­pre­ci­a­tion and em­pha­size stocks that tend to be less volatile and pay com­pet­i­tive div­i­dends.

Other strate­gies may come into play too, such as an­nu­ities that pro­vide life­time in­come in re­tire­ment, or al­ter­na­tive in­vest­ments that can di­ver­sify your port­fo­lio.

A fi­nan­cial ad­vi­sor can help you de­ter­mine a strat­egy that suits your spe­cific cir­cum­stances as you pre­pare for a smooth re­tire­ment land­ing.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.