The three- to five-year stretch after retirement can be tricky for investors, because that’s when they have the most amount of money in their portfolio.
If it’s invested incorrectly, that can have a very big negative consequence on their lifestyle, says Brian Walsh, a certified financial planner with SoFi. That’s why, in addition to an emergency cash fund, it’s important to maintain that three- to five-year bucket of expenses in a short-term bond portfolio you set up in your sixties.
But retirement can last a few decades, so don’t get too conservative. “We see people get to retirement and assume they have to dial the stock portion way back,” says Tim Steffen at Baird Private Wealth Management. “Be careful not to pull back too far. You don’t need every dollar of the money that you’ve saved for retirement on day one.” Indeed, you should slowly increase portfolio risk in the years after you retire to guard against longevity risk—the risk that you outlive your money.
In your seventies and older, consider holding at least 30–50 percent of your assets in stocks and the rest in bonds and cash. “It’s not uncommon for retirees to hold 60 percent in stocks and 40 percent in bonds and cash,” Steffen adds. Whether you tilt toward more or fewer stocks will depend on your risk tolerance and how much you’ve saved. “If you under-saved, you need to earn a higher return. That means taking on more risk. But if you’ve saved a ton of money, you don’t need to take on risk,” says Walsh.
Stay diversified. Some retirees make the mistake of focusing too much on generating income. “If you’d focused on the highest-yielding dividend sectors over the past 15 years, you’d have missed out on the biggest rally in large-company growth stocks, which tend to pay little to no dividends,” says Paul Winter, a certified financial planner in Salt Lake City.
Increasingly, there are options for retirees who want help figuring out how to turn their nest egg into a source of income. Your 401(k) plan may offer a target-date fund with an annuity component that offers regular, paycheck-like payments.
BlackRock’s LifePath Paycheck and Nuveen’s Lifecycle Income series are two examples. T. Rowe Price has a version, too.
And some fund firms are offering products designed to provide a consistent amount of cash per month. T. Rowe Price Retirement Income 2020 (TRLAX) and T. Rowe Price Retirement Income 2025 (TRAVX) are two; they aim to generate an annual income of about 5 percent of the fund’s average net asset value over the past five years. Schwab’s Monthly Income funds—Schwab Monthly Income Payout (SWLRX), Schwab Monthly Income Target Payout (SWJRX) and Schwab Monthly Income Flexible Payout (SWKRX)—all provide a monthly income stream with varying parameters and payouts.
