Some investors are concerned about the volatility of the stock market, yet all retired investors do better with investments that grow faster than the rate of inflation. Stocks have historically been the best asset class to keep ahead of inflation. What is a retired couple to do?
What percentage of your portfolio should be in stocks?
At one time, the thumb-rule for investing in retirement said you should have the same percentage of your portfolio in low-risk bonds as your age. So a retired couple at age 70 will have 70 percent of their money in bonds. But there's a problem. Over the last nine years, the 10-year treasury bond has not paid more than 4 percent. For the last six years, it's paid more like 2 percent. If you put 70 percent of your money in bonds paying you about 2 percent for the next 10 years, it's pretty hard to keep ahead of inflation.
A better idea is to have money in buckets based on when you plan to need it.
- Living expenses over the next 24 months should be in cash, safe and easy to get at.
- Money you will need in 25 to 40 months can be in short-term bonds that will pay 1 percent or 2 percent, but will also keep the principle safe.
- Money you don't need for 41 months or more can be invested in a balanced portfolio of stocks that will produce dividend income and growth that should beat inflation over time.
One key to making this approach work is to know how much you will need and when you will need it. That requires a realistic record of what you are spending now and an understanding of how that will change over time. A comprehensive financial plan can provide just such a road map.
How do you get a retirement plan?
If you work with a fiduciary financial planner – one that is specifically committed to place your best interest first – you can expect to have a financial game plan that sets you up nicely for retirement. And if the fiduciary is a fee-only planner, she only gets paid by you. There is no incentive for the planner to recommend a product or service because it pays her a commission. The fee-only, fiduciary approach allows you, as the client, to be confident the advice you are getting is all about how to reach your goals. That makes a comprehensive financial plan from a fee-only, fiduciary planner extremely helpful as you transition into retirement.
Part of the benefit of a comprehensive financial plan is that it will include an asset allocation for your investment accounts. Since it's a comprehensive plan, your asset mix will reflect your age, your retirement goal, your plans to spend the money and a professional assessment of the current market conditions. And often a financial plan will call for regular updates of your accounts based on new developments so you’re prepared to adjust when an adjustment is needed.
If you have a fee-only, fiduciary advisor who can help you with the process, there’s a very good chance you will own the right investments for your situation and meet your retirement goals.
If you want to talk about how much stock you should own in your retirement, contact my office at email@example.com. I am always happy to meet with people who are working on their retirement plans.
Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.