A Retirement Planning Advisor on Income Planning from Age 60
It’s getting close to retirement. The day is marked on the calendar. You have an appointment with your retirement planning advisor. The stock market has created some bumps in the road in the past few years. And if you recently took a hit, you’re probably trying to set yourself up to eliminate going through that rollercoaster again.
Traditional investment models teach that you reduce your risk exposure over the years. Carrying fewer equities looks like a good way to pare down those risks. For those who make rules about finances, a common rule of thumb has been to allocate assets between stocks and bonds based on how old you are. As such, as your 60th birthday approaches, you should be looking at 40% of your assets in bonds and 60% in stocks. But is that what your retirement planning advisor recommends now?
Unfortunately, bonds and cash equivalents have lower payouts than they once did. It was undoubtedly a great idea back when you could invest in a bond at 9% to 10% or a CD at 5% or 6%. That’s just not how it is anymore, so as you face retirement, the old rules of thumb simply do not apply.
The True Risks of Retirement Now – Advice from a Retirement Planning Advisor
There was a time when the greatest risk there was in retirement was losing some of your money on some stocks. And while nobody wants to lose money, there are much bigger concerns now for those who will retire soon.
As you celebrate your 60th birthday, you can reasonably expect to have to finance 30 or more retirement years as lifespans continue to increase. Outliving your retirement income is the real risk now. As longevity compounds with inflation, your purchasing power is bound to decrease significantly over the next two or three decades. If you end up drawing out more capital sooner, you’re more likely to run out of money. This was not the plan when you set up your strategy with your retirement planning advisor a few decades ago.
Guaranteed fixed-income investments may feel more secure until you realize how little purchasing power they preserve against rising prices. So, rather than trying to avoid market risk, in these last few years before retirement, it may be time to embrace it. Now you can still generate higher returns to expand your retirement income and maintain your purchasing power over time.
Your 60th birthday may not feel like the time to start a long-term investment plan. But an optimal diversification strategy may enable you to capture market returns and minimize the volatility in your portfolio. Using a bucket strategy, you diversify the market risk levels you take while your money generates the income required to meet your cash flow needs.
Preserving Purchasing Power with a Bucket Strategy
A bucket strategy simply divides your assets into buckets. These buckets each have goals in specific time frames. So, the asset allocation in that bucket is meant to achieve that particular objective. Much like the envelopes you may have used in your youth for budgeting, the buckets all have specific purposes.
- Bucket #1 – Cash and cash equivalents adequate to cover the initial three years of expenses.
- Bucket #2 – Short and immediate-term investment-grade bonds to generate some yield with reduced risk. These are for your cash flow for four to nine years from now.
- Bucket #3 – Growth portfolio in equities and bonds for income needs for 10+ years.
It’s easy enough to see how this compares to having just a single portfolio, usually like Bucket #3, when the market is volatile. If you withdraw during a market decline, the asset value and anything you could recover is lost.
As you celebrate your 60th birthday, the added security of the assets in the first 2 buckets gives you the freedom to invest more aggressively in bucket #3. This is one way to strategically extend your retirement income with your retirement planning advisor.