Everyone should have a strategy for meeting their goals in retirement, but retirement can last for decades; you should adjust your strategy periodically depending on where you are. We are taught that we need to grow our investments to the biggest number possible, but when is that number sufficient enough to provide for your unique retirement goals? Let’s look at how retirement goals change throughout life phases.
You should adjust your strategy periodically depending on where you are.
Your 30s: Stock-heavy with time on your side
When you are in your 30s, retirement is on the back burner, and risk often isn’t a consideration in most investment plans. There is plenty of time to recoup losses if you suffer anything drastic. You’re probably contributing to a 401(k), 403(b), or IRA while trying to obtain the best returns possible with most of your portfolio invested in stocks. At this stage, retirement isn’t even part of your investment picture. You most likely have different financial goals, like buying a house and having children.
Your 40s: More diversified with more bonds
In your 40s, you become more worried about a balanced portfolio and steady returns. You may start to reduce risk by taking on a more diversified portfolio, perhaps by using bonds rather than stocks. College tuition for your children may be in sight, the cost of which is growing at a rate that surpasses most investments!
Your 50s: Time to save even more and de-risk
Now come your 50s, and you’re in the homestretch. Most of your saving is done. The kids are out of college, and you’re making up for lost years of not saving enough – it’s time to go gangbusters! Very likely, you’re making the most money of your career and hopefully taking advantage of it by saving more, not just spending more. Of course, you want to earn as much as possible, but you don’t want to suffer any extreme losses to your investments.
Your 60s: The Retirement Red Zone
In your 60s, you hit the most crucial decade, also known as the Retirement Red Zone. You can’t afford to suffer losses. Your retirement date is probably occurring in this phase of your life; retirement goals have been made and are hopefully obtainable with your current savings. Now is the time to keep your eye on the ball. If your goals are attainable, the amount of risk you should be taking must be lowered considerably. In other words, it’s time to take some chips off the table! In Warren Buffet’s February 2018 letter to his investors, he said, “It is insane to risk what you have ... to obtain what you don't need.” If you’ve reached the point where your savings will allow you to sustain a comfortable retirement, Buffet’s words couldn’t be more fitting.
As you near retirement, it is imperative that you pay attention to the risk in your portfolio or assets. When you are 10 or more years away from retirement, you can afford to take on more risk because you have the time to make up any losses. Think back to 2008 – most people suffered substantial losses. If you weathered that storm and remained invested, 10 years later, you should have made up those losses and then some. But, what happens if you suffer a similar loss a year or two before retirement? Now you have a very small window to make up for your losses, and it could be difficult or nearly impossible to recoup those assets. Suddenly, your goal of retiring is pushed back a few years, or the income that you were hoping to generate from your assets is reduced, diminishing your quality life during retirement.
When you are 10 or fewer years away from retirement (especially if you’re in the one-to- five-year range), it is crucial that you take a look at how you are invested. You should consider reducing the amount of risk you’re taking on, especially if the amount you have saved is enough to meet your goals. Reducing risk doesn’t always mean rebalancing your stock-to-bond ratio.
Some important questions to ask yourself are:
- Do I have enough liquidity or emergency money in the bank? You need to have an emergency fund, should you have any unexpected expenses in retirement.
- Should I reposition to products with guaranteed income streams to help supplement my Social Security or pensions?
There are products available that can provide you with what a lot of people no longer have: guaranteed income outside of Social Security.
These are issues you need to consider, and this is a dialogue your financial advisor should have already started with you. More than ever, it is crucial that you sit down with your advisor as you get closer to retirement and continue to do so even into retirement. If they haven’t told you to consider reducing the risk of your assets, you should be asking yourself, “Why haven’t they?” Does this mean you haven’t achieved your goals yet? Or, are they just not paying attention to your goals like they should be?