Are you closing in on retirement or already retired? Even at this stage of life, market risk could still pose a threat to your savings.
After all, many people still keep some money in the market after they’ve retired so it will have the potential to keep growing for many years. But no one really knows how the market will move or how much assets will increase or decrease in value.
So how can you defend against that kind of uncertainty? What are some lower-risk retirement investments? And how can you encourage your savings to grow without putting it at unnecessary risk?
These smart money moves may help you achieve that important balance.
Reevaluate Your Risk Tolerance
As you move toward and through retirement, the makeup of your portfolio should probably change. That’s in part because your risk tolerance evolves over time.
Think of it this way: When you still have decades to go until you retire, you’re in a position to recover and maybe even make gains after a market downturn. So your portfolio might include a heavy weighting toward stocks with higher growth/higher risk potential.
But as you inch closer to retirement, you’ll have less time to make up for any losses. So you’ll likely want to increase the percentage of your portfolio that’s allocated to lower-risk investment choices.
The key here is balance—maximizing the chances that your hard-earned money continues to grow without exposing yourself to unnecessary loss of capital.
Using the Bucket Strategy to Strike a Balance
The bucket strategy can be a smart way to strike a balance between higher- and lower-risk investments. With this approach, you divide your money into short- and long-term “buckets.” When you need money, you take it from the short-term bucket and then refill it with money from selling some investments in longer-term buckets. A good financial advisor can guide you in customizing a plan that fits your risk tolerance and long-term goals.
Review Your Cash Reserve
There can be a definite downside to holding too much of your retirement nest egg in cash. And that’s the loss of growth.
Not only do you want growth in order to build your net worth over time, but you also need it to outpace inflation. If the rate your cash is growing is lower than the rate of inflation, you’re effectively losing money because the purchasing power of your cash is decreasing.
That said, holding a certain amount of cash in reserve can be a practical choice as you enter and travel through retirement.
How Much Cash Should You Hold?
You’ll want to keep an emergency fund on hand—liquid, accessible money that you can tap if the unexpected occurs. That might be a sudden medical bill, an unexpected home repair or a blown transmission on your car.
You’ll want to fortify yourself against market downturns. Without cash in reserve, you could be forced to sell investments each month for income. And that could mean selling at a loss instead of waiting out the market, recouping those losses, and selling high.
You'll want to think about how long you want your cash to last before needing to replenish it. Some experts have suggested saving enough to cover three to six months of expenses; others say one, two or even three years.* The choice is personal, and of course, we’re always happy to talk it through with you.
Remember Diversification
No matter how closely you watch the market, you can’t predict its movements with certainty—no one can. As you know, that unpredictability can cost you if you put all your eggs in the wrong basket. And, if you’re approaching retirement—or already there—it may be harder to bounce back from that loss.
So what strategy might help you avoid an unexpected blow to your portfolio? Just as it was when you opened your first retirement account, diversification is still the answer. That’s a big word for spreading your money out across several types of assets. Good diversification takes advantage of the fact that your different assets respond differently to shifts in the market. Some go down, some go up. Diversifying your investments isn’t a guarantee that you won’t lose money, but it may reduce both the likelihood that you’ll incur a loss and the size of any loss that does happen.
How you diversify—the makeup of your portfolio—depends on your risk tolerance, the state of the market and your time horizon. Therefore, the way you seek growth can change over time.
For instance, investing in quality companies may provide a steadier path to growth by better weathering the ups and downs of economic cycles. This means you would increase your allocation to large, familiar companies (so-called blue-chip stocks) that historically have carried less risk over time and decrease holdings in companies that offer more growth and risk potential.
Investing for retirement is never without risk. But with the right strategies, you may be able to greatly reduce the danger of financial loss while you stay on course with your financial goals. And that can help you build your savings to support the retirement of your dreams.
How Much Cash Should Retirees Hold?, by Michael Yoder, CFP®, CRPS®, Kiplinger, June 18, 2018.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Diversification does not assure a profit nor does it protect against loss of principal.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.