The 'Ultra-Low-Risk Portfolio': A Good Choice for Wary Retirees?
Shifting away from stocks reduces risk, but as our Wealth Wise columnist explains, you still need to beat inflation. Here's how to balance safety and risk with a 15/85 portfolio.
Dear Wealth Wise: I'm in my 60s and will retire in March 2027. I'm happy with the amount I have saved and, at this point, would like to keep no more than 15% in equities. Where should I put the remaining 85% to generate stable income? — Intentional Investor
Dear Intentional Investor: When you're in the process of building wealth for retirement, it's common to invest the bulk of your portfolio in stocks. But it's equally common to shift away from stocks as retirement nears to reduce risk.
Our reader has clearly done a good job of saving for retirement and understands their income needs. They want minimal stock market exposure so they can sleep at night. Here's the approach our experts suggest to build an ultra-low-risk portfolio.
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Bonds can get the job done
Bonds are often a great fit for retirees because they offer predictable income without the wild swings the stock market is known for. Paul L. Gaudio, CFP, director and wealth planner at Crestwood Advisors, says that for a simple portfolio, a broad investment-grade bond fund or a pure Treasury bond fund could be a good choice.
These funds can deliver competitive yields without the homework of tracking individual maturity dates, he notes.
That said, it's important to consider near-term cash flow and upcoming expenses.
"If they have specific spending needs coming up, then a Treasury ladder may offer a great solution," Gaudio explains.
"Picture splitting money evenly across 1-, 2-, and 3-year Treasuries," he continues. "Each year a rung matures, and that principal is there for spending or reinvesting at whatever rates look like then. It's predictable and helps reduce some interest rate risk."
"You saved enough, and you want to sleep at night, so we build you a paycheck, not a portfolio to babysit." — Stoy Hall
Municipal bonds may be worth a look
Keeping taxable income as low as possible in retirement is crucial. When income creeps up, it could trigger Medicare premium surcharges called IRMAAs, or income-related monthly adjustment amounts, that could add hundreds of dollars per month to the cost of Part B.
The "problem" with bonds is that interest payments are commonly included in taxable income. That's why Gaudio says municipal bonds may be worth considering.
"If they're in a high tax bracket, municipal bonds deserve a serious look," he says. "Municipal bond interest is exempt from federal tax entirely, and home-state bonds usually avoid state tax, too."
On the other hand, municipal bonds can't protect you from IRMAA surcharges, as their interest is added back to your modified adjusted gross income (MAGI).
Gaudio also says that for higher-income retirees, municipal bonds can offer more financial upside than Treasuries when accounting for tax-equivalent yields.
However, he cautions, "The trade-off is lower headline yields and thinner liquidity than Treasuries, so they work best as part of the mix, not the whole allocation."
It's worth considering an annuity
Retirees who are extremely risk-averse are often willing to forgo portfolio gains and liquidity for peace of mind. In that case, Gaudio says, "If this client’s true concern is guaranteeing income, then it may also be appropriate to consider an immediate annuity with a portion of their wealth."
As Gaudio explains, an annuity requires an up-front sum that guarantees income for the remainder of the client’s life. But annuities have certain drawbacks. They can be complex and often come with hefty fees. They may also lack inflation protection.
"The trade-off is that the principal is locked up in exchange for that guarantee, so it works best for money the client won’t need for flexibility or legacy purposes," he says.
Focus on liquidity
When you're retired and are actively using your savings to cover living costs, it's important to make sure you have enough safe, liquid assets to cover at least a few years' worth of living expenses, says Stoy Hall, CFP and founder at Black Mammoth.
"High-yield money market funds are paying in the neighborhood of 3.5% right now, and Treasury bills are around 3.7% and backed by the government," he says. Both could be appropriate places to stash one to two years of living costs.
Hall also recommends building a CD ladder for mid-term liquidity. With this approach, "cash lands in your lap on a schedule and you're never forced to sell anything at a bad time."
Protect against inflation
Hall understands the desire our reader has to unload risk.
"You saved enough, and you want to sleep at night, so we build you a paycheck, not a portfolio to babysit," he says.
On the flip side, Hall cautions that over the course of what could be a 30-year retirement, a 15% equity allocation exposes you to inflation risk. For this reason, he says, the remaining 85% of your income needs to keep up with the cost of living.
To this end, he says, it could be wise to put money into TIPS, or Treasury Inflation-Protected Securities, as well as I-bonds. TIPS adjust the bond's principal for inflation, while I-bonds adjust their interest rate. (Note, however, that I-bonds impose an annual investment limit of $10,000 per individual.)
"With most of your money in fixed-rate assets, this is your hedge against the one force that quietly shrinks a 'safe' retirement," he adds.
Look at the big picture
Many financial experts warn that a 15% equity allocation can erode purchasing power over time.
Gaudio says this allocation could work for some people, but not everyone.
"It tends to make the most sense for clients spending this money within the next five years, or clients who are highly risk-averse and have spending needs well below their portfolio's long-term potential," he says.
Ultimately, Gaudio explains, the right investment mix depends on a given retiree's full picture, including their income needs, spending patterns, and tax situation.
"That's where working with a planner earns its keep, translating a menu of good options into the portfolio that actually fits this investor's life," he insists.
Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our writers and experts, in this advice column, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial adviser regarding any questions you may have in relation to the matters discussed in this article.
Read More Wealth Wise Stories on Asset Allocation
- Is a 60/40 Portfolio Too Aggressive in Your Seventies?
- Should Fully Funded Retirees Invest Like 30-Year-Olds?
- You’ve Mastered Asset Allocation — Now It’s Time for Asset Location
