Managing your portfolio in retirement

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One of the biggest financial impacts of retirement is the mind-set change that is needed to manage your portfolio.  Prior to retirement, financial planners recommend having “ready-cash” or an emergency fund equal to 3 – 12 months of expenses.  In addition, every month you are adding money to your portfolio through 401(k) accounts, IRAs, etc.

In retirement, the dynamics of your portfolio are turned upside down.  Instead of adding to your savings every month, most people need to take money out of their portfolio every month.  Next, people generally become more conservative as they get older, meaning your split between stocks and bonds (aka “asset allocation”) needs to change.  Finally, at age 70 ½, regardless of your spending, you need to start to take Required Minimum Distributions (RMD’s) from your retirement accounts.  From a financial planning perspective, the ability of your portfolio to withstand a sudden, sharp decline in value (ala 2008, 2000, 1987, 1973, etc.) is significantly reduced.

What can you to do manage your retirement portfolio better?  Here are my general recommendations:

1)      Create a budget and understand your monthly income and spending.  There are several products and investing methods that you can buy to reduce your monthly cash needs.

2)     Create a “Cash Bucket” by setting aside enough money to cover 3 to 5 years of expenses in excess of the income identified in item 1 above.  This money should be invested very conservatively in CDs, cash and short term bonds.

3)     Invest the balance of your portfolio to keep ahead of inflation, but still within your comfort level.

4)    Periodically, look at your cash bucket.  If your investments did well in the prior year, add to the cash bucket.  If your investments did not do as well you targeted, allow your cash bucket to go down a little.  This will help your portfolio recover or protect unexpected gains.

5)   Review your investment portfolio at least annually to make sure your stock / bond split is still within your target.  If you use non-index mutual funds or individual stocks, your review should be more requent.

6)      As you reach age 67, start making the changes needed in your retirement account so you can fund your upcoming RMDs from cash in the account and the income generated on the investments without needing to sell any of your holdings.  This may mean changing the account where your cash bucket is held, depending on how large your retirement portfolio is.


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