Portfolio Management As Retirement Approaches

The Importance of Portfolio Management as Retirement Approaches

Updated on Sep 12 2018


As retirement approaches, you need to make sure you re-assess your investment portfolio to minimize risk and strategize how your assets will serve as a regular, stable income so that you don’t outlive your assets.

Retirement income management is strategizing how your retirement savings will provide enough income to meet your unique needs. To do this, you need to set up or adjust a specific retirement portolio that’s geared for maintaining your retirement lifestyle.

Here are top tips to manage your investment portfolio as retirement approaches:

1. Take Inventory of Your Assets to Organize Your Portfolio

The amount of money you have when you begin retirement is one of the most important factors in determining how to manage those assets during retirement.

If you are diligent about retirement planning, have a large enough portfolio and are careful with your spending; you may have enough generated monthly income that you don’t need to dip into your principal. If you are in this situation, a combination of bank products such as CDs and Treasury bonds to preserve your principal, along with dividend-producing stocks and bonds, may be the starting point for your investments in retirement. The key is to take an inventory of your financial situation to assess what strategy makes the most sense for you.

For example, most retirees begin retirement with a more modest nest egg that will require you to tap your principal at some point. An investment strategy is important to make sure you don’t run out of money; a fear many Americans have in the 21st century when people are living longer.

Here are a couple important decisions to make, based on your inventory:

  1. How do you strategically withdraw from accounts, and at what time? For example, you have time be careful with timing for fee and tax purposes.
  2. How should you make your portfolio more conservative as you approach retirement?
  3. When should you and your spouse retire to maximize your return of retirement investments, like Social Security and 401k?

A professional financial advisor or fiduciary can help you assess your portfolio inventory to manage investments and avoid serious mistakes that can jeopardize your financial wellbeing.

2. Reassess Your Risk

As you head into retirement, you need to take a fresh look at your level of investment risk, especially the possibility of losing money from your investments. Your investment time horizon is one of the biggest factors in assessing risk as you may no longer have time to recover from market downturns as you get closer to retirement. It’s important to assess whether the proportion of your assets in higher-risk securities is greater than it should be. Achieving the right balance is key to manage retirement income over 30+ years.

Here are other risk factors to keep in mind:

  1. Minimize you inflation risk, or the possibility that the change in prices will outgrow your purchasing power.
  2. Time withdrawals so that you’re not losing potential ability to grow investments to provide income for life.
  3. Time withdrawals to minimize taxes.
  4. Diversify your portfolio enough to protect your retirement income from losses or market swings.

Basically, you will want to consider all of your assets and income sources, the effect of taxes and your unique circumstances when deciding what to do with any particular account. A qualified financial advisor can help you assess your portfolio’s risk and an investment strategy for your retirement.

3. Strategize Your Asset Allocation

One strategic approach to investing during retirement is to maintain a particular mix of investments in your portfolio that you believe will provide the return you seek, at a level of risk you are willing to take. The process of creating such a portfolio and spreading out your risk is known as asset allocation.

Asset allocation is important because each investment category, such as stocks, bonds or cash, tends to perform differently in different economic conditions. If you spread your investment principal among a number of different types of securities, you are often able to smooth out the ups and downs of your overall portfolio.

To manage expenses and make your money last, you will likely have a combination of income-producing and growth investments.

Here are a couple things to keep in mind:

  1. Income-producing investments such as stocks that pay dividends, bank products like CDs and bonds are important in retirement because once you stop working you typically need this money to live on.
  2. Growth investments, such as growth mutual funds and individual stocks that are expected to grow at a faster rate than their peers or overall market, but come with greater price fluctuations.

Throughout retirement, you’ll need to adjust your asset allocation gradually. For instance, you might want to move money into different investments in response to a lifestyle change or to accommodate a change in economic conditions. An professional financial advisor can help educate and guide you on what might make sense for your investment portfolio and unique financial situation.

4. Gain Income from Selling Your Investments

Receiving investment income isn’t the only way to draw retirement income from your investments. You can also get money by selling your investments if they are worth more than you paid for them.

While taxes shouldn’t be the primary consideration in making an investment decision, you should consider the consequences of selling investments you hold in taxable accounts. You may have to pay capital gains taxes on the profit from the sale, as well as commissions to a broker for handling the transaction. If you have owned the investment for more than one year, you may owe capital gains tax, which fluctuates by tax-bracket.

Be careful liquidating many of your holdings during any single year, though, as you could drive up your tax bill if you don’t have offsetting capital losses.

Keep in mind:

  1. It’s important to plan ahead if you’ll be selling equities to provide current income.
  2. Tax penalties for any sale.

5. Make Your Principal Last

Making your money last as long as you need it requires a disciplined approach to spending. Experts advise that you don’t overspend your first few years of retirement. They also suggest that you be prepared to cut back on extras if your retirement portfolio suffers losses in a given year. The other key to stretching your retirement income is sound management of the yearly withdrawals you make from your retirement portfolio principal.

An expert financial advisor can help you determine what withdrawal rate makes sense, and from what accounts, to help you make your principal last.

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