Feeling financially conservative at retirement age? Your golden years need not be totally devoid of growth investments.
Now that the bulk of holiday spending is behind us, it’s time to get back to thinking about saving money again—specifically, your retirement savings portfolio.
Entering retirement is no reason to stop thinking about your asset allocation. You may decide to take a more conservative track around your retirement age, but your golden years need not be totally devoid of growth investments.
First, let’s look at the difference between portfolio reallocating and rebalancing.
Rebalancing your portfolio is something you might do every year or so to get it back to whatever your target allocation may be. Let’s say you have allocated 60% of your portfolio to stocks and 40% to bonds. Depending on performance during the year, that allocation may have tipped, perhaps to 65% and 35%, which might mean selling some stock and buying some bonds to get back to your target balance.
Reallocating is different. It means deciding to change the target percentages for different asset classes or sectors.
Reallocation may be in response to market dynamics or shifting macroeconomic factors. Maybe you want to allocate more to large-cap companies versus small-cap stocks, or bulk up your emerging markets holdings versus developed nations.
Another big reason to reallocate is to adjust for changing risk tolerance as you age, said Matt Sadowsky, director of retirement and annuities at TD Ameritrade. That may mean holding less risky instruments to try to lessen the volatility in your assets as the steady paycheck you've gotten for years is replaced with retirement or investment income.
“If you’re moving into retirement, you're going to be relying on your nest egg,” he said. “Now you're shifting to a more defensive stance. You want to make sure your nest egg can get you through retirement comfortably.”
Prior to retirement, you were probably paying your bills with the paycheck from your employer. During those years, you wanted to grow your portfolio as much as possible within your risk tolerance.
In retirement, your portfolio is hopefully generating income from dividends and interest. And there are other sources of income to consider, including part-time employment, annuities, Social Security, or a pension, to name a few.
But if you end up having a shortfall, you may need to sell some investments to meet your needs.
Perhaps the worst time to see a market downturn is early in your retirement years. This is because if you need to liquidate some assets, there may be less available in the portfolio to bounce back when the markets rebound, Sadowsky said.
So investors might want to be more conservative a few years before and a few years after they retire to mitigate the impact of a potential market downturn, he said. One way to do this could be to have a heavier allocation in cash, fixed deferred annuities, or individual bonds, he said.
But your retirement portfolio doesn’t always have to be as conservative as possible. Because retirees may live several decades into retirement, they don’t need to entirely avoid growth-oriented equities, he said.
“You want to have some of your portfolio invested in growth,” he said.
Matt Whittaker is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2022 Charles Schwab & Co. Inc. All rights reserved.