“ It ’ s all about striking the right balance between preservation and growth, ” says Rob Williams, frailty president of fiscal plan and retirement income at the Schwab Center for Financial Research. “ After all, when you need your savings to last 30 years or more, being besides conservative excessively soon can put your portfolio ’ randomness longevity at risk. ”
With that in mind, here are three tips for creating a retirement portfolio that ’ randomness more probable to go the distance .
Tip 1: Protect your downside
Making a big withdrawal from your retirement savings in the midst of a downturn can have a negative impact on your portfolio over the long-run. To help protect against that possibility, it ’ s a good theme to add two safety nets to your retirement portfolio :
- A year’s worth of spending cash: At the start of every year, make sure you have enough cash on hand to supplement your regular annual income from annuities, pensions, Social Security, rental, and other regular income. Hold the money in a relatively safe, liquid account, such as an interest-bearing bank account or money market fund.
-
Two to four years’ worth of living expenses:
Over the past 50 years, it took the S&P 500® Index an average of roughly
three years and eight months to recover from a downturn
. So it’s wise to keep two to four years’ worth of living expenses
in short-term bonds, certificates of deposit (CD), or other reasonably liquid accounts. This way, you’ll have access to cash during a downturn if you need it, without selling stocks.
Tip 2: Balance income and growth
once you have your short-run reserves in place, it ’ s time to allocate the remainder of your portfolio to investments that align with your goals, time horizon, and risk allowance. ideally, you ’ ll choose a mix of stocks, bonds, and cash investments that will work together to generate a firm current of retirement income and future growth—all while helping to preserve your money. For case, you could :
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-
Build a bond ladder: Purchasing bonds with staggered coupon and maturity dates can help even out your portfolio’s yields over time and provide a steady flow of income.
-
Opt for dividend-payers: Consider adding some dividend-paying stocks to your portfolio. Not only do they offer a regular stream of income, but they also allow your principal to remain invested for potential growth.
-
Stick with stocks
:
Make sure
you don’t dial back your exposure to stocks too soon. Having a larger allocation of stocks in the early years of retirement will help guard against the risk of outliving your retirement savings. Later on, you can adjust your allocation to focus more on generating income and preserving your money.
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Shifting your strategy
Investors in the early years of retirement may want a greater allotment to stocks to guard against longevity risk, while those in their late years will want to prioritize income generation and capital conservation .
This example is hypothetical and provided for illustrative purposes only.
Tip 3: Consider all your income sources
As you put in concert your retirement portfolio, you besides need to think about the character your savings will play in your overall income plan. For example, how much income do you expect from undertake sources like annuities, pensions, and Social Security ?
“ If these guarantee income streams will generate enough income to cover the majority of your expenses, you might be able to maintain a more aggressive stance with your portfolio well into retirement, ” Rob says. “ conversely, if you ’ ll trust on your portfolio for the majority of your income, you ’ ll need to take a more balance approach with your investments. ”
