At age 51, boasting a prosperous portfolio, you're contemplating retirement at 60 and wish to gradually transition from stocks. Is such a move strategic?
As retirement approaches, making the right investment decisions becomes crucial. Let's take a look at a 51-year-old individual planning to retire at 60, and their strategy for managing their portfolio.
The individual, with a $2 million portfolio, has gains from their investments. They prefer to communicate their bond allocation in terms of 'years of expenses', rather than a percentage of their portfolio. Specifically, they are considering having more than five years' worth of expenses covered by the bond portion of their portfolio.
This approach is based on the key principle of ensuring that savings can both last and keep pace with rising costs. If they need to withdraw $100,000 per year for living expenses and are comfortable with five years' worth in bonds to fall back on during the next market downturn, their overall allocation would be approximately 75% equities, 25% bonds.
However, the individual is considering moving out of stocks to lower portfolio risk. Some individuals may be more risk-averse and would prefer six to eight years in bonds. Erring too much on the side of caution could cause a portfolio to lose to inflation.
To mitigate this risk, the individual is considering alternative investments such as gold and precious metals. These assets could help keep the portfolio from lagging behind inflation.
Investors can also reduce their dependence on stock market performance alone by investing in alternative assets such as real estate.
The appropriate share of stocks for this individual depends on various factors, including their risk tolerance, investment horizon, financial situation, and expected pension needs. With a shorter time until retirement, a more conservative portfolio is advisable, but maintaining some equity exposure can still provide growth potential to help close any pension gap.
Reducing stock exposure well ahead of retirement isn't necessarily a poor choice, especially with proper planning and consultation with a financial adviser. The decisions about asset reallocation should hinge on variables specific to the individual, such as savings for retirement, anticipated nest egg size, and capacity for risk.
If a conservative 4% to 5% rate of return is needed for the next nine years to reach retirement number, it may be prudent to start allocating to bonds now. On the other hand, if a 7% to 8% rate of return is required, one might stay all in stocks until about three to five years out for a better chance of hitting the goal.
In conclusion, as we approach retirement, it's essential to consider our risk tolerance, investment horizon, and financial situation when making decisions about our portfolio. By considering alternative investments and planning ahead, we can ensure our savings will last and keep pace with rising costs.
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