Diversification used to be simple enough. A typical portfolio included stocks, bonds, and cash.
But that kind of traditional diversification has proven less effective in recent years as market volatility has increased. Discovering if your portfolio is designed to prosper during good market environments and withstand poor ones is essential.
We spend our lives saving and accumulating for retirement. Many people do a good job of diversifying and likely have seen their investments grow. But as we approach retirement, our priorities begin to shift. Sure, we still want to grow our money — and stay ahead of inflation. But now protecting what we’ve accumulated — and generating income from it — become the top priorities.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Mitigating risk, maximizing time
A major risk retirees face is having a big market pullback at the same time they are withdrawing their “retirement paycheck.” When that happens, not only does the account value decrease because of poor performance, but it’s further reduced because of the withdrawal. With that withdrawn money gone forever, when the remaining account balance potentially rebounds, the gains will be muted.
Unfortunately, the Swiss Army knife of an investment designed to grow money, protect it from downturns and generate consistent income — all at the same time — doesn’t exist. Instead, to help navigate this delicate landscape, dividing assets among several baskets — and assigning each one a specific time frame and corresponding risk profile is prudent.
Compartmentalization is key. Layered on top of your fixed income streams — like Social Security, pensions and annuities — you can fill baskets designed for income today, conservative investments for the nearer term and more balanced or growth approaches for the longer term. Today’s basket spins off income needed now — allowing the future baskets the time to potentially grow so they are ready when needed.
Here’s a framework of a four-segment strategy to help mitigate poor market timing risk:
- Lifetime income. Sources such as Social Security, pensions and annuities form an “income floor.”
- Fixed income. Positioned atop your “income floor,” this segment is meticulously crafted to gradually deplete over a span of three to five years. Its investments typically lean towards the secure side, often including guaranteed options.
- Balanced. Functioning as a bridge connecting the income and growth components, the balanced segment is typically afforded a time horizon of five to 10 years. Operating as a dual-force engine, profits generated from this category may supplement the income needs originating from the fixed-income segment.
- Long-term growth. Engineered for a growth trajectory spanning more than 10 years, money allocated to this basket aims to benefit from remaining invested through multiple market cycles. This category can also encompass unconventional investment types.
Lacking a well-defined strategy for generating monthly retirement income (unnecessarily) introduces a large element of uncertainty and anxiety. However, implementing a time-segmented retirement income plan installs an overarching strategy to guide the selection of suitable investments aligning with a multiyear, inflation-adjusted income need. By embracing a strategy-oriented approach, individuals can navigate their retirement journey with enhanced confidence.
Dan Dunkin contributed to this article.
The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Bleakley Financial Group, a registered investment advisor. Amwell Ridge Wealth Management conducts advisory business under a “doing business as” (d/b/a) name; however, Bleakley Financial does not hold itself as conducting advisory business through Amwell Ridge Wealth Management. Bleakley Financial Group and Amwell Ridge Wealth Management are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. Investing includes risks, including fluctuating prices and loss of principal.
No strategy assures success or protects against loss. Past performance is no guarantee of future results. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation does not ensure a profit or protect against a loss.
Guarantees are based on the claims paying ability of the issuing company. LPL Financial, Amwell Ridge Wealth Management, Bleakley Financial Group, and Kiplinger are not affiliated.
Related Content
-
Baby Boomers vs Gen X: Who Spends More?Baby Boomers and Gen X are guilty of spending a lot of money. Here's a look at where their money goes.
-
Retire in Finland and Live the Nordic DreamHere's how to retire in Finland as a US retiree. It's ideal for those who value natural beauty, low crime and good healthcare.
-
You're Close to Retirement and Cashed Out: How Do You Get Back In?If you've been scared into an all-cash position, it's wise to consider reinvesting your money in the markets. Here's how a financial planner recommends you can get back in the saddle.
-
After the Disaster: An Expert's Guide to Deciding Whether to Rebuild or RelocateHomeowners hit by disaster must weigh the emotional desire to rebuild against the financial realities of insurance coverage, unexpected costs and future risk.
-
A Financial Expert's Tips for Lending Money to Family and FriendsWhat starts as a lifeline can turn into a minefield if the borrower ghosts the lender. Following these three steps can help you avoid family feuds over funds.
-
What the HECM? Combine It With a QLAC and See What HappensCombining a reverse mortgage known as a HECM with a QLAC (qualifying longevity annuity contract) can provide longevity protection, tax savings and liquidity for unplanned expenses.
-
721 UPREIT DSTs: Real Estate Investing Expert Explores the Hidden RisksPotential investors need to understand the crucial distinction between a REIT's option to buy a Delaware statutory trust's property and its obligation.
-
I'm an Insurance Expert: Yes, You Need Life Insurance Even if the Kids Are Grown and the House Is Paid OffLife insurance isn't about you. It's about providing for loved ones and covering expenses after you're gone. Here are five key reasons to have it.
-
My Professional Advice: When It Comes to Money, You Do YouThis is how embracing the 'letting others be' and 'learning to surrender' mindsets can improve your relationship with money.
-
Direct Indexing Expert Explains How It Can Be a Smarter Way to InvestDirect indexing provides a more efficient approach to investing that can boost after-tax returns, but is it right for you?
