Investing Portfolio Peace of Mind, Now and in Retirement

Retirement savers should know how their investments are doing, but they should try not to become too obsessed with the ups and downs of the market.

The market will always fluctuate — that's how the financial world works. Political unrest, turbulent foreign affairs, election results or even a viral social media post can cause shifts in investment value. Facing these moments, I always tell my clients to stay the course, especially if they have many working years left to look forward to.

Temper Volatility with Diversification

But my clients nearing retirement have different issues to consider. Sudden drops in the market can have long-term negative consequences when withdrawing money from a portfolio. Diversification is the key. While I recommend all of my clients diversify their portfolios, it’s especially crucial for those nearing retirement.

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Diversified, conservative investments give you financial flexibility. As funds are needed to meet living expenses, you can withdraw them from investments in your portfolio that are stable or growing. In other words, if you have a mix of financial buckets to draw from, you won't deplete the value of your investments in a loss situation.

For example, a retiree who withdraws $5,000 a year from a $500,000 portfolio of mainly growth stocks will find when the market is flat, their stocks only represent 1% of their portfolio’s value because they’re selling a minuscule number of shares. In a steep downturn, that $5,000 withdrawal might encompass more than 1% of the portfolio’s value. Furthermore, when the market recovers, the investor would find they have fewer shares gaining value, resulting in a permanent loss of assets.

A well-balanced retirement portfolio should consist of stocks, bonds, annuities and, in some cases, life insurance. Crafting a portfolio with the right combination of investment vehicles depends on what your short-term and long-term goals are, your risk tolerance, and how we think your investments might evolve over time. For instance, someone nearing retirement might focus more on limiting the risk to their wealth principal by allocating more of their assets to a mix of interest-bearing accounts, such as money market funds, bonds and cash, rather than stocks, which are typically riskier.

Final Considerations: Inflation and Cash

While principal protection is paramount, growing net worth can help the retiree keep up with inflation. When your salary is no longer negotiable, investment growth is how you can fend off the loss of real income due to inflation. It all starts with analyzing your spending patterns and trimming back any superfluous costs, thereby creating an accurate projection of where you're most at risk of outliving your retirement funds.

Depending on your situation, we could advise income-generating investments, for instance, owning a rental property or starting a side hustle to help replenish your retirement savings. For others, downsizing to a smaller property or revising the payment schedule for future major expenses might be more practical.

 Retirees should also maintain a substantial cash reserve. Having non-volatile funds on hand will enable you to deal with temporary financial needs, such as an illness, major appliance failures or damage to your home, without exhausting your portfolio. In general, the more cash you have on hand, the better, but try to aim for at least one to two years’ worth of living expenses. Make sure your funds are easy to access in an interest-yielding savings account or money market account to help you maintain the stability you need.  

The Bottom Line: Stay Calm and Focused

Finally, every investor — retiree or young earner — should remain calm and stay the course. The markets will shift. There will be good years and not-so-good years. But through it all, your investment professional should be with you, reminding you the best way to weather a storm is to remember that all storms eventually pass.