Keeping Your Portfolio Intact for the Long Haul
As millions of Americans prepare for their transition into retirement, the number one concern is the fear of outliving their retirement savings. Get tips on how to be proactive and reduce the risk of prematurely depleting your nest egg.
One of the first factors to consider is that most strategies designed to extend the life of your retirement savings portfolio come with trade-offs. Accordingly, the secret lies in understanding the various options available so that you can identify the strategy that provides the type of trade-offs with which you are most comfortable.
One of the first steps you can take when addressing the ability of your portfolio to go the distance is to review your overall portfolio allocation strategy to ensure that it is appropriate for your current age, risk profile, and retirement income objectives.
This is best done in partnership with your financial advisor who has the knowledge and expertise in constructing portfolios for purposes of generating retirement income. The skill set needed to construct a portfolio strategy for retirement income is more robust than the skill set typically needed to construct a portfolio strategy for accumulation. Simply put, there are more variables to consider when planning for retirement income.
Even the experts don’t always agree on what is the best portfolio construction for retirement income. While conventional wisdom typically has called for a major shift towards fixed income as one nears retirement, a contrary school of thought has taken root in recent years as some financial experts argue that a greater degree of equity exposure is warranted in retirement if one wishes their income to keep pace with inflation over a retirement horizon that can easily extend beyond 25 or even 30 years for some households.
For most retirees, setting up a retirement income stream from a portfolio of investments requires a plan for identifying how much you can afford to withdraw from your portfolio on a monthly or annual basis. While selecting a reasonable withdrawal level at the time you start taking withdrawals is critical, it is only the first step.
One of the surest ways to deplete your portfolio prematurely is failing to devise a method for monitoring your withdrawal rate in the future to determine if, and when, adjustments may be warranted (either upward—to keep pace with inflation or in response to positive market conditions, or downward—to proactively adjust your withdrawal rate in response to poor market conditions).
While few people like to contemplate the prospect of giving themselves a “pay cut” in retirement, a small adjustment downward (or even simply taking a pass for a year or two on your annual cost-of-living adjustment) can be far more palatable than finding yourself in a situation where drastic reductions are necessary in the future.
When it comes to determining how you will monitor your withdrawal rate (and make midstream adjustments, if necessary) the alternatives, as you might suspect, vary. Talk to your financial advisor to see what approach he or she recommends. Consider factors such as your spending habits and personal disposition, and then settle in on a strategy that feels right for you. Even in the event you elect to change your mind down the road, you’ll be miles ahead simply due to having implemented some type of formalized process for monitoring your withdrawal rate on an ongoing basis.
Given that the life expectancy for today’s average retiree is greater than the life expectancy for his or her counterpart 30 years ago, concern about outliving retirement savings is a legitimate concern that warrants attention. Fortunately, there are proactive strategies available to reduce this risk and, reduce the corresponding stress that often accompanies the risk.
While the best strategy will vary for each individual, the fundamental strategy of being proactive—vs. reactive—is appropriate for all.
Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. Download a prospectus, or summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing.
Diversification and asset allocation cannot ensure a profit or protect against a loss in declining markets.
Equity funds are subject generally to market, market sector, market liquidity, issuer and investment style risks, among other factors, to varying degrees.
Bond funds are subject generally to interest rate, credit, liquidity and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes, and rate increases can produce price declines.
Withdrawals are taxed at then-current income tax rates. Consult your tax advisor to assist with a withdrawal strategy. Contact your Dreyfus Advisor for more information and to review your individual investment plan.