This Is How to Take a Long-Term Approach to Investing in Retirement

This Is How to Take a Long-Term Approach to Investing in Retirement

In the last decade, there’s been a new school of thought when it comes to how those nearing retirement age should allocate their investment assets. Historically, most professionals recommended lowering risk as people approached retirement so that only a small portion of their portfolio was invested in equities. Nowadays, however, individuals in their mid-60s are likely to live another three decades, leading many to allocate more stocks in their portfolio than previously recommended. While it still makes sense to grow more conservative over time, retirees can still stay somewhat aggressive with their investments.

However, market fluctuations can make investors nervous, particularly those who are very close to retirement or who have just retired. Anxiety can cause people to make decisions based more on panic than logic, which is a serious mistake.

Many people can tune out fluctuations in the market in the decades leading up to retirement because they know they are playing a long game—i.e., dips in the market now will not likely matter several decades down the line. However, people nearing retirement may feel like they are in a more precarious position and be more reactive in their decisions.

At the same time, rash decisions can cause people to sell at a loss, which is unwise in retirement. Because recent retirees are still playing the long game, they need to have a healthy stock allocation when they retire if they want their nest egg to continue generating money for decades to come. Though recovering from a major loss early in retirement is possible, it is quite difficult.

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Different Strategies for Approaching Risk in Retirement

During the financial crisis of 2008 and 2009, the stock market lost about 50 percent of its value, and retirees with nest eggs balanced evenly between stocks and bonds experienced an overall loss of about 25 percent. This sort of drop forced people to make different decisions and readjust creatively.

The problem with significant drops early in retirement is that people are forced into selling low, which locks them into the overall loss. In other words, they cannot benefit when the market eventually recovers. This sort of loss accelerates the depletion of a portfolio, so it can be very dangerous for recent retirees.

This fear of loss is what led to the traditional idea of lowering exposure to equities as retirement approaches. Most accounts that automatically rebalance for people approaching retirement aim for about half of the nest egg to be invested in stocks when the accountholder stops working. However, a new group of experts is starting to suggest a very different approach to asset allocation. They suggest increasing allocation to equities over time.

A 2013 study found that portfolios starting conservatively at retirement with about 20 percent to 40 percent in stocks which then increased to 50 percent or 60 percent actually lasted longer than those that had static allocations or that had fewer equities over time. Of course, this strategy can backfire, especially if you act on impulse, but being too conservative means you run the risk of not earning enough money to offset inflation.

Figuring out What to Do in the Current Market Climate

For people approaching retirement or who have recently retired, the question then becomes how to manage their portfolio effectively. This question is especially pertinent given the recent turbulence in the stock market. Ultimately, you will need to take a step back and look closely at your allocations. Because of the market losses, your allocations may have become more conservative without you even trying (which is not necessarily a bad thing for some people). During a market downturn, it is important to focus as much as possible on other sources of income instead of selling stocks and locking in a loss. Other sources of income may include cash or even a whole life insurance policy, which includes a cash savings component you can tap into.

When you need to sell investments, you should focus on the safer ones, such as bond funds, so that the others have time to recover. Also, insurance products such as annuities can remove some of the financial pressure. When buying annuities, you need to be careful since they may prove expensive, complex, and even deceptive. Many people prefer to stick with the simpler, more straightforward products, such as single-premium immediate annuities. Some experts recommend using products like these as a steady income stream that will cover any monthly expenses not met by Social Security. However, you should know that the current low-interest rates mean low returns with annuities.

An annuity right now may not sound like a great deal, but it can lift a rather heavy emotional burden. People seriously stressed about how their investments will fare in the months and years to come can use annuities to ensure that they meet their monthly minimums and continue to stay afloat.

You may want to speak to a certified financial planner to figure out the best move in the current environment. Recent retirees need to stay focused on the long term while maximizing the performance of their portfolio. For some people, staying conservative may make sense, but others may want to be more aggressive with their allocations.