At age 51, considering your well-stocked portfolio and aiming for retirement at 60, the question arises regarding the wisdom of transitioning from stocks. Is such a move prudent?
Planning for Retirement: Shifting Investment Strategies
As retirement approaches, it's essential to reconsider one's investment strategy to ensure a comfortable and secure retirement. A person planning to retire at the age of 60, who is currently 51, has started to contemplate moving out of stocks to lower portfolio risk.
If a higher rate of return (7% to 8%) is required to meet retirement goals, it might be beneficial to stay all in stocks until closer to retirement. However, for those who are content with a conservative 4% to 5% rate of return, it may be prudent to start allocating to bonds now. Some individuals may prefer a more conservative approach, with three to eight years in bonds, depending on their risk tolerance.
A 51-year-old retiree planning to retire in nine years should gradually reduce equity exposure to lower portfolio risk. This can be achieved by shifting towards more stable investments such as bonds or defensive assets, focusing on diversification across asset classes and regions to minimize risk. Quality dividend-paying stocks or defensive sectors can still play a role to balance income and risk preservation before retirement.
Regular portfolio reviews and adjustments are essential to protect assets and ensure sufficient income during retirement. Daniel Gleich, CEO & President at Madison Trust Company, suggests considering alternative assets like real estate and precious metals when moving away from stocks ahead of retirement. Shifting into less volatile assets could be part of this rethinking investment strategy.
The financial advisor prefers communicating bond allocation as 'years of expenses' instead of a percentage. For instance, if a person has a $2 million portfolio, needs to withdraw $100,000 per year for living expenses, and is comfortable with five years' worth in bonds to fall back on during the next market downturn, their overall allocation would be approximately 75% equities, 25% bonds.
It's generally not a bad idea to start shifting money to more conservative assets like bonds, but decisions should be based on personal variables. Factors that should influence the decision include how much has been saved for retirement, the anticipated nest egg size, and the capacity for risk.
Erring too much on the side of caution could cause a portfolio to lose to inflation over a decades-long retirement. Therefore, it's crucial to find a balance between risk and return that aligns with one's retirement goals. Working with a financial adviser can help ensure that reducing stock exposure doesn't derail any retirement goals.
Health care costs, which tend to rise faster than general inflation, are a crucial factor to protect purchasing power during retirement. Thinking about how many years of expenses can be covered with non-stock assets is a common strategy in the lead-up to retirement. Gold and precious metals could help mitigate the risk of a portfolio lagging behind inflation.
In conclusion, as retirement draws near, it's important to reassess one's investment strategy to ensure a secure and comfortable retirement. This may involve shifting towards more conservative assets, diversifying across asset classes and regions, and considering alternative investments like real estate and precious metals. Regular portfolio reviews and adjustments, along with the guidance of a financial adviser, can help protect assets and ensure sufficient income during retirement.
