When you’re young you invest for growth. The risks are higher, but over time the returns are better. If the stock market suffers stormy weather, there’s plenty of time to right the ship. This lesson should be fresh in our minds from the great recession. The market went down, and so-called growth stocks went down the most. But now, almost a decade later, the markets have made up those losses and then some. Investors are better off than ever before.
But what if you retired in 2007 and had to start cashing in your investments and use the money to live on? With no time to wait for a recovery, you likely lost a lot of money and perhaps had to reduce your lifestyle in retirement.
With that in mind, here are five suggestions for achieving steadier returns, more secure income and more peace of mind throughout retirement.
[Read: How to Pay Less Taxes on Retirement Account Withdrawals.]
1. Make modest withdrawals. One investment rule of thumb says you can withdraw 4 percent of your assets every year and not run out of money over a retirement lasting 25 or 30 years. However, in today’s low interest rate environment, when bonds often yield less than 4 percent and bank deposits even less, some analysts have questioned the 4 percent rule. These days many experts recommend withdrawals more in the 3 percent range to ensure that your money will last as long as you do.
2. Use a dynamic withdrawal strategy. This method allows you to take out 4 percent of your assets or even more as long as you are willing to be flexible and withdraw less during a bear market when your portfolio loses value. With this plan, retirees typically start out withdrawing 5 percent of their assets. If the portfolio increases over the course of the year, then they can continue to withdraw 5 percent the next year, perhaps even giving themselves a little extra bonus. But if the portfolio loses value, then the withdrawal rate needs to be closer to 3 percent for the year. Obviously, this strategy is more complicated, and you may need an adviser to help you do the math.
[Read: Tax Breaks for People Over 50.]
3. Invest to reduce volatility. No matter what your withdrawal rate, you don’t want your retirement portfolio to fluctuate too wildly during the year or from year to year. You can’t afford the time to wait out a lengthy bear market. This means focusing your equity investments in larger, safer and slower growing stocks, mutual funds or ETFs, rather than the next big thing in high tech stocks. It also means investing less in stocks and more in bonds, perhaps 60 percent stocks, 30 percent bonds and 10 percent cash at the start of retirement. But be careful. Make sure the bond portion of your portfolio is concentrated in safe, highly rated bonds, not risky, high yield bonds that often fluctuate right along with the stock market.
4. Increase your yield. Larger, safer stocks known as value stocks typically generate higher dividend payments, which allow retirees to live off the interest rather than dip into their principal. But again, be careful. Dividend stocks tend to be more cyclical and often rise and fall as a group. So even with a safe retirement portfolio, you want to be diversified, at least to some extent. A portfolio should be crafted for total return including bonds and dividend stocks, but with a limited amount in growth stocks to protect against inflation and the possibility of higher interest rates.
[Read: How to Retire Without $1 Million in a 401(k).]
5. Rebalance your portfolio. The world of investing is unpredictable and volatile. You never know where the next twist in the market will take you, which assets will be bid up in price and which will fall into disfavor. The way to hedge against the vagaries of the market is to rebalance your portfolio on a consistent, periodic timetable. Some people rebalance every quarter, but for most people once a year is enough. Keeping your portfolio targeted on your original compass heading requires you to sell off some winners to produce the cash you need for withdrawals as well as lower your exposure to a hot and risky market. The key is to rebalance in a systematic way, not based on the latest headlines or your own gut feeling. Having plenty of ballast and keeping an even keel is the tried-and-true way to find clear skies and smooth sailing for your retirement portfolio.
Tom Sightings is the author of “You Only Retire Once” and blogs at Sightings at 60.
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5 Ways to Invest for Income in Retirement originally appeared on usnews.com
