In Your 60s? The Principles of Asset Allocation for Retirement

1 Asset Allocation for Retirement Header ImageWhen it comes to your retirement planning portfolio, there’s a big trade-off that you’ll likely need to consider: safety versus growth.

Considering that many retirees want their savings to last a lifetime, safety is often top of mind – that means a “capital preservation” investment strategy and a focus on low-volatility investments.

But that very need can make the safety mindset a risk in itself. Lower volatility can spell danger when it comes to making your savings last, especially if you’re withdrawing more than your account earns every year.

So how do you strike the right balance? Let’s start with the principles before diving into what you can do in your personal situation.

Capital Preservation and the need for income

Safety of savings isn’t the only reason a retiree might favor a capital preservation strategy.

The need for consistent annual income is another important factor. Even if that income is lower than it “might” have been with higher average growth, knowing that they’ll be able to withdraw a certain amount every year means a lot to many retirees.

Of course, this might work more effectively if you don’t need to take a significant amount of income from your portfolio (as opposed to other sources), or if your income needs are relatively modest. It can also make sense if you have significant savings on a dollar basis.

What often gets overlooked

With longevity inching higher for retirees, it’s increasingly important to consider whether your portfolio can keep pace with you for the long haul.

Two factors that are often overlooked in the safety mindset are inflation and the long-term effects of using principal for income.

Inflation is currently 1.9%, which probably doesn’t seem like much. But over the course of a 20- or 30-year retirement, inflation can completely change your dollar income needs.

cloud-download


Your Retirement Transition Plan

Access Your Guide Below

This is even more important when you factor in that not all spending categories experience the same inflation rates. One recent estimate found that medical costs will rise 6% in 2017 and are expected to grow another 6.5% in 2018.

This number is shockingly high, and 2017 represented a 10-year low.

Drawing down principal is similar: it’s easy to fall into the trap of thinking that a little bit of principal won’t make a big difference. In fact, the effects add up over time, and they can be significant.

If you’re planning to use your principal for income, be sure to run the numbers carefully to help minimize the risk that you’ll draw down too quickly.

Growth and longevity risk

Managing the need for long-term sustainable income is where the growth mindset comes in.

For retirees who need to stretch their savings as far as possible – meaning higher and longer-lasting income – investing for long-term growth can make sense.

Riskier equity-based investment strategies tend to have higher average returns over a long period. That mean that you may be able to choose a higher withdrawal rate without risking too much loss of principal.

Even if you withdraw conservatively, keeping your portfolio growing can help mitigate risk factors like higher ongoing healthcare expenses, a sudden health crisis, or changing budget needs.

The risks of a growth strategy

That said, pursuing growth is not without risk. The biggest risk is a drop in the market that impacts your portfolio’s ability to grow and your ability to generate income.

Generally speaking, if you want to pursue a growth strategy, it is advisable to have other income sources in place that you can turn to in times of market trouble. The best way to keep your assets growing over the long-haul is to keep them invested during downturns, rather than withdrawing for income.

If you can reduce or eliminate your need for portfolio income when the market goes south, you will make it easier to achieve the benefits of long-term growth.

Developing your own approach

Once you understand the principles of capital preservation versus growth, consider how they relate to your needs.

Take the following factors into account:

  • Your retirement income needs and budget
  • Your retirement income sources
  • 1 Asset Allocation for Retirement Info ImageYour total asset base
  • Any specific risk factors that you might be facing, like reliance on your portfolio for income or a chronic health condition
  • Your legacy plans and preferences – do you want to leave money behind for your heirs, or is your full capital base fair game for retirement income?

Together, your financial profile and your preferences will help guide as you start researching the investment strategies that can make sense for you. Working with an advisor can help: here at Vitucci & Associates we have specialized calculators and tools that can help you make better projections, as well as experienced advisors who can help you align your goals with the reality of your finances.

Special section: Retirement income planning

One of the hardest parts of retirement investing has nothing to do with stocks and bonds: retirement income.

How much money do you need? How might your needs change? The answers to these questions vary widely from one person to another, but there are two major spending categories you’ll want to think about carefully:

  1. Lifestyle factors

 

Lifestyle factors include your housings costs – including taxes and maintenance – and your hobbies, travel plans, and everyday budgets for groceries and entertainment.

In our experience, many retirees have a more active lifestyle in the first decade or so of retirement, and start to enjoy a slower pace later on. That means you might be spending more on hobbies and travel in early retirement than you’d expect, and you may see some of that spending redirected towards medical or other needs later.

Finally, take a good look at your housing situation. For example, you might be hale and hearty now, but if you happen to have mobility problems down the road it could be difficult to stay in your 3-story condo.

So plan ahead – the longer onramp you have for these types of decisions the better, as you can consider your options, get all the information you need, and shop around for possible solutions.

  1. Medical costs

 

This is a big spending area for retirement and a major risk factor for financial security.

Be sure to have a serious and honest look at your health, what you can do to manage it, and what your potential needs are around insurance and long-term care. An extended stay in a nursing home can decimate your financial plans if you aren’t prepared – so it’s important to be prepared.

Second, keep in mind that healthcare spending tends to rise over the course of life: a Federal Reserve study found that average spending on medical needs doubles between ages 70 and 90. On average, Americans over 90 spend more than $25,000 per year on medical expenses.

Even if you have the best Medicare plan and private coverage, you will still be shouldering part of this burden – factor in inflation and you can see how serious it is.

Make your retirement transition a smooth one

 Transitioning into retirement can be stressful and confusing. How do you know you’ve done everything you need to? Download our free guide to transitioning into retirement to find out. Your Retirement Transition Plan covers all the major areas you need to address before you take the leap into retirement, with topics ranging from health to housing, insurance to investment.

Click here to download Your Retirement Transition Plan free today!

cloud-download


Your Retirement Transition Plan

Access Your Guide Below

Let Us Help!

We can discuss this topic and more at a complimentary appointment. As a bay area retirement planning coaches, we can give you a review and make suggestions based on your retirement objectives.

1 Asset Allocation for Retirement Infographic

Important Disclosures

& Associates Insurance Services or United Planners Financial Services (United Planners). The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by United Planners.

To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values. United Planners does not render tax advice.

Securities and advisory services offered through United Planners Financial Services, member FINRA, SIPC. Pasquale Vitucci, CA Insurance Lic. # 0758212, is an Endorsed Agent of Vitucci & Associates Insurance Services CA Insurance Lic. # 0I06319. Vitucci & Associates Insurance Services and United Planners are separate and unrelated companies.

  • Buying A Retirement Home? Don’t Forget About Taxes!
    If you’re looking for a new home in retirement, you might be considering buying as much house as you can afford. This is retirement, after all! But that’s not always a prudent decision. One of the key downsides to buying “more house” is the potential for more property tax. It’s one of the less glamorous aspects of home ownership, but it can be an important source of additional costs that eat into your retirement budget – and it can take even savvy home buyers by surprise. How can you be a property tax strategist? Read on to learn more.
  • 5 Ways to Use Life Insurance in Retirement
    For some retirees, life insurance isn’t a necessary expense. This can especially be the case if you have an income plan for both spouses, a clear-cut estate plan, and no dependents. But sometimes life insurance coverage can be a useful part of a retirement plan. Of course, making insurance coverage decisions can be complicated: buying a new policy is a far cry to adding features to an existing one, and in all cases it’s important to do your homework so that you select the right options for your needs. Be sure to speak to your financial advisor about your needs and the appropriate solutions. With that in mind, let’s get started.
  • Don’t Forget This When Considering an Annuity
    As you build your retirement income plan, you might have felt the tug between two competing interests: stable and predictable income versus holding on to your assets (or trying to invest them to make more money). Fixed annuities in particular tend to bring out this internal conflict. For example, we had a client, Edward, who identified retirement income security as his most pressing retirement concern. But when we talked about the possibility of a fixed annuity for his situation, he balked at the idea of relinquishing his savings to buy it. His questions were common ones: “What if I die in 5 years? What if I want to leave money to my kids?” While it might not seem like it from the outside, this is an absolutely normal response. When considering any financial decision, it’s all a matter of perspective – and there’s nothing like writing a big check to bring your perspective into sharp relief. That’s why it’s important to remember what you’re buying when you choose an annuity (or any other insurance or investment product), and to frame the decision accordingly. Here’s how.