Retirement

A New Investment Plan for a New Retirement

Five ways you may want to adjust your retirement plan as people live longer, more active years.

by Lance Elko - October 03, 2016

Thanks to medical advances, more people are living longer and with an eye on a healthy lifestyle. That’s terrific news for everyone. But a longer, more active life also means rethinking traditional views of your needs for retirement, and that should include a critical look at how your portfolio is put together.

It used to be that as individuals and investors got close to and entered retirement, they changed their portfolios to have less exposure to equities and more to fixed income in order to protect what was built over the years. Drew Denning, Retirement Strategist for Wells Fargo Advisors, notes that now, however, you may need retirement income for 30 or more years. And he adds that with an inflation assumption of 3%, your costs will double in 24 years.

So how do you help ensure you stay as financially healthy as you are physically fit for all those wonderful years of retirement? Denning outlines five suggestions to rethink the way you invest in retirement.

1) Reconsider your risk

For starters, Denning advises that you revisit your risk tolerance. For those transitioning from working to retirement, this advice is even more important. “The loss of a regular paycheck can cause more aggressive investors to become even more nervous when a market correction occurs. If you cannot either emotionally or financially withstand a market correction without withdrawing from the market, then your portfolio is too risky,” says Denning.

This doesn’t mean, however, that you should move to 100% bonds. “Keeping a healthy dose of exposure to stocks and/or equities can help a portfolio keep pace with inflation,” he adds.

2) Keep a cash reserve

Most people know the importance of keeping an emergency fund during your working years, but what about when you’re drawing down on existing funds? Conventional advice about establishing a cash reserve bears repeating, according to Denning. When a market decline occurs or when you have an emergency expense, your cash reserve can be a resource not only financially but also emotionally. Denning points out that analysis shows that this reserve should cover anywhere from one to three years of essential expenses.

The average lifetime health care expenses for a 65-year-old healthy couple retiring in 2015 and covered by Medicare parts B, D, and a supplemental insurance policy will be more than $400,000 once out-of-pocket medical expenses are added into the equation.

3) Adjust your habits for market conditions

“Consider using adaptable spending if your budget allows,” counsels Denning. “When your portfolio declines in value, reduce your planned withdrawals; and when the market increases, increase your withdrawals or spending.” This approach, he adds, “can dramatically increase the long-term sustainability of your portfolio.”

4) Focus on fixed income

Although it’s important to maintain an allocation of stocks, bonds, and cash in your portfolio, pay special attention to your bond allocation, Denning advises. “In today’s low-interest-rate environment, many analysts are predicting a slow and steady increase in rates during the next five to 10 years. While increasing rates are desirable to retirees, it can also have a negative impact on the value of your bond portfolio.

“For instance, if interest rates rise by 1%, a bond portfolio with a 10-year duration will decrease in value by 10%,” Denning says. A possible solution: “I would suggest selecting a bond portfolio with a two-to-three-year duration, where a 1% increase in rates would only result in a 2% to 3% decline in the value of the portfolio.”

5) Build your health care plan

As life spans and the number of years you spend in retirement increase, you likely will be subject to a corresponding increase in health care expenses. According to a 2015 report from HealthView Insights, the average lifetime health care expenses for a 65-year-old healthy couple retiring in 2015 and covered by Medicare parts B, D, and a supplemental insurance policy will be more than $400,000 once out-of-pocket medical expenses are added into the equation.

Regarding this somewhat sobering statistic, Denning advises to pay attention to your health and address any medical issues before they have a chance to become major concerns.

It’s not your parents’ retirement — the same strategies that worked for them may not be right for you if you’re looking at spending 25 or more active years as a retiree. Taking a thorough look at your investment strategy may help ensure you’ll be enjoying every one of those years.

Lance Elko, a freelance writer based in Greensboro, North Carolina, is the former editor of US Airways Magazine and USAA Magazine.

Image by iStock

Additional Resources

For some, “retirement age” is a thing of the past as they choose to keep working.