Once you’ve dedicated a lifetime to building your retirement savings, transitioning to actually using those funds can be daunting. Many retirees find themselves hesitant to dip into the nest eggs they’ve painstakingly cultivated over the years. The prospect of managing this account, knowing it must sustain them for the remainder of their lives, can add an extra layer of anxiety.
Thankfully, there are principles to guide you through this phase. Here are four key rules for navigating retirement investments:
1. Embrace a balanced approach
With increasing life expectancies, retirement spans can easily extend over two decades or more. Today, a 65-year-old man can anticipate living nearly to 85, while a 65-year-old woman can expect to surpass 86, on average. And these are merely averages; many will live well into their 90s.
While longevity is a gift, it also means your retirement funds must stretch further. Thus, it’s crucial to resist the temptation to overly prioritize safety in your investments during later years. Playing it too safe with bond-like returns won’t suffice.
This philosophy is evident in modern target-date funds. For instance, Vanguard’s Target Retirement 2020 fund, tailored for those on the brink of retirement, presently allocates 54 percent of its assets to stocks. Even as retirement approaches, these funds maintain a significant stock exposure, acknowledging the need for growth.
For individual portfolio management, following suit with a healthy stock allocation is prudent.
2. Avoid undue risk
Conversely, don’t succumb to excessive risk-taking. In the current enduring bull market, there may be temptation to chase higher returns, particularly if your retirement savings feel inadequate. However, such recklessness jeopardizes both your portfolio and your peace of mind.
Adhere to the principles of asset allocation. If your ideal mix calls for a 50/50 stock/bond split, adhere to it. Eventually, the bull market will wane, and you’ll appreciate having maintained a prudent level of risk. If uncertain about your optimal mix, tools like Vanguard’s asset allocation questionnaire offer clarity.
If your nest egg falls short of ideal, remember there are alternatives to jeopardizing investments. For instance, extending your working years, even by a few months or a year, can significantly bolster your financial standing.
3. Implement a Cash Reserve
One significant risk to your retirement portfolio is what’s known as the sequence of returns risk. This refers to the possibility of the market declining right as you enter retirement. While market fluctuations are normal, a substantial downturn at the onset of retirement can strain your finances throughout your retirement years.
If you tend to lean towards a more conservative risk approach, one strategy to mitigate this risk is to adopt the bucket strategy. This involves setting aside a portion of your portfolio in a cash account equivalent to two to three years’ worth of essential living expenses. This cash reserve acts as a buffer, allowing you to avoid withdrawing from your investment accounts during bear markets.
During market downturns, you can draw living expenses from your cash reserve, giving your investment portfolio time to recover. Conversely, during market upswings, you can replenish your cash reserve using a portion of your investment gains.
4. Ensure Financial Alignment with Your Spouse
In many marriages, there’s a division of responsibilities, with each spouse managing different aspects of household affairs. If one spouse has been primarily handling investment management, it’s crucial to involve the other spouse in the process, especially as you approach retirement. This ensures that both spouses are equipped to manage finances in the event of one spouse’s passing.
If you’re the primary investor in your household, initiate discussions with your spouse about your investment portfolio. Share information such as the number of accounts, total balances, online passwords, and investment strategies. Discuss contingency plans for managing the portfolio if one spouse were to pass away, particularly if the current approach is complex.
Achieving financial peace of mind in retirement is one of life’s greatest rewards. Following these steps can help you navigate retirement with confidence and security.
