Retirement planning involves more than accumulating a nest egg; it requires strategic management of a traditional portfolio to optimize income during your retirement years. To get this right, it’s important to understand how your portfolio may change during retirement, how to optimize income with a strategic approach, and what types of portfolio allocation strategies work best for retirees. Here are some elements to consider:

Retirement and Your Investment Strategy

When you retire, your financial focus generally moves from accumulating wealth to drawing down on your retirement savings and investments so you can generate a stable income. This change necessitates a shift in your portfolio's strategy—one that often sees retirees adjusting their asset allocation away from higher-risk investments, like equities, towards more conservative options like bonds and cash. This shift can help manage risk and maintain steady income through interest payments and dividends.

However, some exposure to growth assets remains important. A portfolio entirely composed of conservative investments might struggle to keep pace with inflation over the long term. A balanced approach that includes both growth and income-generating assets can reduce the risk that you outlive your money.

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Speak to a Wealth Enhancement advisor about retirement income planning today.

Optimizing Income with a Strategic Portfolio Approach

A strategic retirement portfolio approach involves balancing income generation with capital preservation. Diversification is a key aspect of this approach.

To optimize income, it’s important to choose the right mix of investment vehicles. These may include:

• Stocks. Stocks can position you to beat inflation, realize ongoing growth, and earn income through dividends. Although the percentage of your portfolio dedicated to stocks may decline over time, income-producing equities will likely play a role in your portfolio strategy.
• Bonds. To receive reliable interest payments while protecting your capital, consider including both corporate and government bonds in your retirement portfolio. Keep in mind that the returns you realize from bonds are linked to interest rates. A bond ladder may help mitigate this risk. This involves buying bonds with staggered maturity dates to protect against a volatile interest rate environment.
• Real estate investments. Real estate can generate rental income and potential appreciation, and thanks to real estate investment trusts (REITs), it’s possible to gain exposure to the real estate market without the risks associated with ownership.
• Annuities. Annuities offer a steady income stream that is backed by insurance companies, which can help preserve your income over time. That said, they may come with certain fees and complexities, so it makes sense to get some advice before selecting which annuities to invest in.

With a proper approach to portfolio allocation, you can combine these income sources to create a stable, diversified portfolio that meets your retirement needs.

Portfolio Allocation Strategies for Retirees

Finding the right retirement portfolio allocation depends on your unique financial situation, goals, and risk tolerance. A common guideline is the “60/40” rule, which suggests allocating 60% of your portfolio to equities and 40% to fixed-income investments.

However, as you approach and enter retirement, your ideal allocation may change. For instance, as you age, you may choose to reduce the percentage of stocks you own and increase your fixed income holdings. Similarly, your risk tolerance will dictate the types of investments you feel comfortable holding.

A Word About Risk Tolerance

Understanding your risk tolerance is essential when structuring your retirement portfolio. Factors influencing your risk tolerance could include your:

• Time horizon. Longer time horizons may allow for more aggressive investment strategies, while shorter horizons typically favor a more conservative approach.
• Financial goals. Your goals, such as funding travel or health care, will impact your willingness to take risks.
• Personal comfort. Your emotional response to market volatility, and the portfolio fluctuations it may cause, also plays a significant role in your risk tolerance.

A financial advisor can help you assess your risk tolerance and tailor your portfolio accordingly.

An Approach to Income Withdrawals

Structuring an optimal retirement income portfolio is only the first step to optimizing your income during retirement. Another factor involves your approach to income withdrawals. The goal is to withdraw enough to cover living expenses while preserving your portfolio for future needs.

One approach is bucket investing, which involves dividing your portfolio into different “buckets” based on time horizons and risk levels:

• Short-term bucket: Holds cash and low-risk investments for immediate income needs. Optimally, the liquid assets you hold in this bucket can cover at least one year of retirement spending, so you won’t need to sell longer-term assets at an inopportune time.
• Mid-term bucket: Contains bonds and other income-focused investments with the aim of generating sufficient interest income to cover up to three years of retirement spending.
• Long-term bucket: Includes equities and growth-oriented assets that align with your goals and risk tolerance so you can continue to realize capital appreciation.

The right withdrawal strategy depends on your financial goals and risk tolerance, and may change over time, so flexibility is key.

How to Manage Your Retirement Portfolio

Managing your retirement portfolio requires ongoing monitoring and adjustments to make sure your investments align with your changing needs and goals. Generally, this means periodically reviewing your portfolio to assess performance and make necessary adjustments, rebalancing your portfolio as needed to maintain your target asset allocation, regularly assessing and adjusting your portfolio’s risk level, and optimizing your withdrawals and investments to minimize taxes.

The Wealth Enhancement team can help you manage your retirement portfolio.

Frequently Asked Questions about Retirement Income Planning

How can I optimize income during retirement? Consider a diversified approach that includes dividend-paying stocks, bonds, real estate investments, and annuities. This mix can help provide consistent income streams and potential growth.

What is the best portfolio allocation for retirees? As you age, your portfolio allocation may shift from 60% equities and 40% fixed-income investments to a more conservative allocation, such as 45% equities, 35% fixed income, and 20% cash. However, your ideal allocation may differ based on your age, risk tolerance, and other factors.

How do I assess my risk tolerance? Factors like your time horizon, financial goals, and personal comfort with risk influence your risk tolerance. A financial advisor can help you assess and tailor your portfolio accordingly.

What are the key steps in managing a retirement portfolio? Key steps include regular reviews, rebalancing, tax planning, risk management, and seeking professional advice. These steps can help ensure your portfolio remains aligned with your goals.

The Bottom Line

With careful planning and strategic management, you can structure your traditional portfolio to meet your retirement income needs. Your financial advisor can help you understand how your portfolio changes during retirement, optimize income with a strategic approach and select the best portfolio allocation for your needs.

If you’d like to learn more about retirement income and your traditional portfolio, contact a Wealth Enhancement advisor.

Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor and affiliate of Wealth Enhancement Group®. Wealth Enhancement Group is a registered trademark of Wealth Enhancement Group, LLC.

There is no guarantee that asset allocation or diversification will enhance overall returns, outperform a non-diversified portfolio, nor ensure a profit or protect against a loss.

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