Investment Portfolio Strategies In Retirement

People who are in their 50s should have a different mix of assets in their portfolio compared to investors in their 20s or 30s. This much we know. Obviously, the closer you are to retirement (and the age when you will start to draw money from your portfolio), the more conservative you would want to be. The last thing you want to happen is a nasty surprise during your first year or two of retirement. Can you imagine working for thirty or more years, and finally relaxing on the beach with a cold beer… only to open the newspaper and read about the market plunging 500 points?

But what exactly should a portfolio look like for people who are in their 50s or early 60s and are getting ready to draw out money? There are a few options to consider when approaching the golden years.

Don’t Be Too Conservative: There’s an old joke where a broke elderly gentleman goes to the doctor and gets some bad news: “Sorry Mr. Johnson, but you are completely healthy and will live a long time. (It’s funnier if you are a financial planner I guess). It’s no joke, however, if you outlive your money. In the year 1900, the average life span was 47 years. Currently in North America, it’s up in the 70s, and many people will live to see 90 and beyond. This means that you should have at least 25% (and up to 50%) of your portfolio in the stock market in some form at age 65. This could be ETFs or mutual funds. Take this route to ensure exposure to the market while avoiding the risk of individual stocks. At this stage, a home run stock isn’t necessary a solid, steady return should be the goal.

Look At Annuities: This is an often overlooked part of financial planning. An annuity is like a life insurance plan that you purchase, but instead of paying out when you die, it pays out while you are alive. Basically, you pay an insurance company an up-front sum of money (like $250,000) and in turn, the company pays you a monthly amount every month for as long as you live. It’s guaranteed money, but there’s a catch: if you pay the money and then die a few weeks later, the insurance company keeps all the money. Alternatively, if you were to live to be 135 years old, the annuity would continue to pay out during that time (and you would reap much more than the original sum that you paid in). Its guaranteed money that you cannot outlive. If you have no dependants (for example, your children are all grown up and do not depend on you financially), then this can be a great option for stress-free money during your retirement. You can’t take it with you, especially if it’s an annuity.

Guaranteed Cash: 50% of your portfolio should be stocks, but what about the other half? It’s a great idea to have something that doesn’t rely on the stock market in general to create wealth. Bonds and REITs are the two big instruments in this regard. A bond is a promissory note and can be issued from a government (federal, state / provincial, or even municipal) or a company. A REIT is a Real Estate Investment Trust. A REIT is like a holding company that invests in real estate properties, takes in rental income, and then distributes it out to unit holders (investors). There are private REITs that do not trade on the stock market, and of course there are many that do. Values fluctuate do to market conditions and also the price of real estate in the market where the properties are located. Usually REITs will pay a monthly or quarterly distribution (similar to a dividend).

Make sure to stay diversified and use all the different wealth-building tools at your disposal as you approach retirement. You just might be surprised at how soon it shows up.

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Comments

  1. RayJMan says

    Nice article, I’m investigating ETFs as well as some mutual funds, but still like the trading flexibility a bit more with ETFs. Overall I guess haven’t decided (just based on market volatality), so sticking with some dip limit orders on stocks with high earnings growth quarter over quarter. One thing I’d like to add that wasn’t mentioned are CDs. There are relatively good ones out there (bankrate.com didn’t mention TD Ameritrade’s 5.3 3 month one for some reason, but bankrate is a good place to start as well as your invidual broker of course). As well CDs are guarantees as they are FDIC insured, however, that being said as well, there are other things to consider such as Fed rate cuts of course and renewals (mine auto renewed at a lower rate). Make sure to read the fine print!

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