Think of this analogy: When an airplane is ready to land, it won't drop to 30,000 feet in a matter of seconds. Instead, it happens gradually. Pilots adjust to landscape and weather conditions to ensure a soft landing. In the years before retirement, you should start treating your portfolio in a similar way. Prepare in advance to protect your assets and adjust to market and economic conditions to help ensure a soft landing at retirement.
Adjusting your portfolio means taking steps to "downshift" as your retirement approaches, reducing some of the risks that may exist in your portfolio. Although you have been focused on building wealth for many years and you have accumulated retirement savings, your focus should change as you approach your working life. It is important to protect the wealth you have managed to build and position your portfolio to generate retirement salaries.
Handling unpredictability
Funds invested in assets with varying values [including stocks and bonds] are subject to cyclical fluctuations. In the past few years, once the market recovers, you may have time to overcome any market turmoil and short-term short-term losses. If you adjust your portfolio after retirement, you may be surprised by the untimely market downturn. This unpredictability can lead to a "hard landing" of your portfolio, with less money after retirement than your plan.
For example, a couple of $1,000,000 savings for retirement may plan to withdraw $40,000 from the account each year [assuming they withdraw 4% of the principal amount each year to maintain retirement for 25 years]. If the money is invested in stocks and the portfolio maintains a 25% decline before retirement, the value will fall to $750,000, and the couple earns $30,000 a year. In contrast, if they strategically position their portfolios before retirement, they may at least partially protect themselves from the market downturn.
a gradual process
The process of shifting from accumulated wealth in the portfolio to income-generating focus should occur over time. One way is to gradually reduce the asset position that you have volatile in the market a few years before retirement. For example, this could mean reducing the stock risk of your portfolio while increasing the position of fixed income investments.
However, even when you retire, not all money needs to be removed from stocks. Historically, stocks have provided more growth potential than many other types of investments. Given today's long life expectancy, you want to be prepared for the higher cost of living from 20 or 30 years after your retirement. Therefore, stocks may still make sense for your situation. You may want to reduce the emphasis on investing in maximizing capital appreciation and highlight those stocks that are less volatile and pay a competitive dividend.
Other strategies may also work, such as an annuity that provides lifetime income when you retire, or an alternative investment that can diversify your portfolio. When preparing for a successful retirement landing, a financial advisor can help you determine the strategy that is right for your situation.
Orignal From: Prepare a portfolio for retirement
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