Paul Tarins, RICP®,WMCP®,CSRIC™
Investing in retirement used to be simple – switch to a 60/40 allocation, take out 4% a year, adjust for inflation, done. The goal was to avoid risk to the principle. But back when that worked, things were a little different.
- Investment grade bond yields were higher than they are now
- If you retired at 65 a good expectation for retirement was about 20 years
- You usually lived in your own home through retirement – and did not have a mortgage
- Healthcare was nowhere near as expensive as it today
One other element that’s different – the children of today’s retirees face a much tougher road than their parents did. They may be the first generation that struggles to improve on what their parents achieved. A lot of our clients are prioritizing helping their kids now and leaving a legacy that extends to grandkids.
How to achieve all that and live the life you’ve been looking forward to? Change up your investment strategy to actively deploy risk. The only caveat: You need to do it in a way that preserves your risk tolerance – and continues to allow you to sleep at night.
The Old Way – Avoid Risk
As investors approached retirement, the standard strategy was often to decrease the percentage of assets allocated to equities and then shift the allocation away from the perceived risk of growth stocks. Dividend stocks were often deployed, for the additional income. The bond allocation would then increase, usually with a combination of Treasuries, municipals, and investment grade corporates. These are all still valid investment strategies, and these types of assets can still have a role in a modern retirement plan.
The New Way – Actively Deploy Risk
Just to be clear, we aren’t suggesting that investing in retirement should look like investing in your 20s and 30s. You have different goals, you have more assets to invest, and you have a different time horizon. But we do believe that there is a way to combine risk taking with risk tolerance.
The Adaptive 60/40 Portfolio
It’s called “adaptive” because it features active asset management that is flexible enough to work with both changes in your lifestyle and your income needs, and changes in markets. It rests on three basic principles:
- Expand the bond spectrum to include bond alternatives that can potentially add yield without increasing risk
- Use a rolling three-year horizon to determine your cash allocation, so that you can potentially avoid liquidating into down markets
- Balance investments in higher-growth equity allocations with lower risk cash or cash equivalents
While that may sound simple, putting it in action is of course a little more complex. It requires tailoring sophisticated, institutional strategies so that they can perform in an individual investor portfolio. It also demands constant monitoring of investments and markets, and an ongoing dialogue with the investor, so that when things change, strategies can follow suit.
The last piece of the modern retirement plan is to think carefully about taxes. Retirement income may come from several different sources, including pensions, social security, tax-advantaged accounts, and taxable accounts. A plan that can maximize where assets are kept and how they are accessed can provide significant tax benefits over the course of your retirement – and that means more money in your pocket.
The Bottom Line
It’s always tempting to view times past as simpler – and maybe better. But when it comes to retirement investing, there’s a lot to be said for making a new approach work for you. You worked hard to build retirement savings, and it required discipline, flexibility and the ability to stick to a plan for the future. When it comes time to spend those retirement savings, you need the same thing to ensure that your assets will fund the life and the legacy you want.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.