Maintain a Diversified Portfolio As You Enter Retirement
As you worked toward retirement, you weathered the ups and downs of the market by focusing on diversification in your portfolio. Entering your retirement years in California, you need to maintain your course (albeit with some adjustments) to ensure your investments are generating the income you need to enjoy this time.
Simply splitting your investments into 50% stocks and 50% bonds is not enough. You need to incorporate a well-conceived investment strategy to avoid stress and the financial pinches that follow poor planning.
Keep in mind, too, that consulting with your trusted Bay Area financial advisor will allow you to tailor a strategy that meets your needs. The following are some basic ideas and strategies that many wealth managers adopt for their clients.
Control Your Spending and Reap the Benefits
Your primary responsibility is to identify your expected expenses for retirement and then plan and invest around that. You must establish a sustainable spending rate for your financial position that also takes inflation into account. As an example, financial advisors believe that a 4-5% spending rate is reasonable, which means your investments need to generate 6.5-7.5% in annual returns if you factor in 2.5% for inflation.
Diversifying your portfolio in retirement means more than just socking away 50% in equities. You should create diversity within your asset classes to spread among different U.S.-based and international stocks in companies of various sizes and industries. You will experience greater risk within these investments than you will in safer investments, such as cash and bonds, but the growth element will allow you to build more wealth for your future. Similarly with bonds, you should spread out your investments to different holdings.
To cast this strategy in a different light, you can think of your portfolio as different areas of money serving different purposes based on time frame. Some advisors suggest you keep enough money in cash and liquid assets to cover two years of living expenses. Another area of money should cover eight years of living expenses in safer investments, such as bonds. Then there’s the portion of money that is designed for more long-term growth (10+ years) that should include a mix of stocks and assets of various risk levels.
Monitor Administrative Costs
Relying on individual stocks and bonds rather than casting a wider investment net is extremely risky because you or your broker may not be able to research and monitor equities well enough to achieve diversification. The diversification principle also applies to the family of mutual funds in which you invest. Many wealth managers suggest investing in different families to access investment viewpoints from different teams of fund managers.
As you seek mutual funds, always keep in mind the administrative fees that chip away at your annual earnings. High fees can quickly negate strong returns, leaving you with less money in your account. Index funds typically provide good diversification in your portfolio at lower costs. Remember to check the fees before you buy into any fund.
Going into retirement doesn’t mean you can just kick back and let your money figure itself out. Now is the time to stay engaged with your investment portfolio and position yourself for a much more enjoyable retirement.