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Initially, you may be focused on reaching your savings and investment goals. But after you retire, it’s important to manage those resources for continued growth. Additionally, an essential component to a successful retirement strategy is ongoing risk management.
“When retirees talk about risk in retirement, they are usually referring to the possibility of outliving their money,” explains Bob Ericson, CFP® and vice president of Life Event Services at Wachovia Securities in Richmond, Va. In addition to overspending, several risk factors may reduce the longevity of the portfolio: inflation, market downturns, unexpected expenses and unknowns like rising health care costs. The following strategies can help you manage these risks to preserve your resources.
Calculating Needs and Risks
“Retirees need their portfolios to be durable, performing as needed in response to inflation and changing circumstances in a world market,” explains Ericson. “Keeping assets diversified to moderate losses is important. When the market drops, you want to be in a position to buy low, rather than needing to sell low to supplement your income.”
Review your current retirement plan annually, and talk with your advisor about keeping your asset allocation model updated to account for your retirement strategy. Your financial advisor can also discuss strategies to help provide for future needs or protect you from risks.
Understanding Investment Risk
Your portfolio allocation shifts with investment gains and losses. It’s important to evaluate the performance and rebalance your assets annually in order to reduce investment risk and make sure your income strategy is on track. Ericson suggests reviewing your portfolio diversification with three factors in mind:
The asset class, such as a high-yield bond, or a government bond, or the stock of a larger or smaller corporation, as these will generally provide different rates of return and be subject to differing levels of price movement and risk.
The tax structure – is the asset subject to capital-gains tax, tax-deferred or tax-advantaged?
The accessibility of the asset, including maturity schedules and required distributions.
The appropriate balance among your investments changes along with your needs and goals. Additionally, your total resources change as you build or draw from your assets. “Your strategies must change to maximize assets in a tax-efficient manner so they are available when you need them,” says Ericson.
Insuring Against Risk
It’s important to plan early for expected and unexpected expenses by identifying resources that you can use to support yourself if your income or health changes. One strategy is using insurance – including life, home and long-term-care insurance – to create new resources and protect your assets from costs you cannot control. “Know your insurance benefits, and buy supplemental insurance to fill in any gaps that might result in out-of-pocket expenses if needed,” suggests Ericson.
If you foresee a need for new income streams later in life, you might want to consider buying a delayed-payout fixed annuity. An annuity provides an income stream from the payout date until the end of your life. But if you delay the start date (and accept the risk of not reaching the date), the initial investment required is less than with an immediate annuity. Ericson recommends pairing this strategy with other scheduled income streams, such as certificates of deposit (CDs) or bond ladders, to develop a schedule where each asset provides you with an income in different years.
The earlier you start planning with your Financial Advisor, the more choices you’ll have. Once you retire, you will want to work closely with your advisor to keep your retirement strategies in step with your lifestyle and needs. “The key to not outliving your resources is early long-term planning and strategic portfolio adjustments using ongoing retirement planning,” suggests Ericson.
Together, we can discuss:
Balancing risk and return in your portfolio
Insurance policies to help meet future needs and to protect your assets
Building emergency assets into your investment plan
This article was provided by Wachovia Securities, LLC. Member SIPC, a registered broker-dealer and separate nonbank affiliate of Wachovia Corporation and Robert Martin and John Martin, Financial Advisors with Wachovia Securities located at 5606 N. Navarro, Ste. 101, Victoria, TX 77904.