By Patrick McKeough, TSINetwork.ca
Special to the Financial Independence Hub
To decide if an investment belongs in your portfolio for retirement, you need to take a close look at its attributes or features. But, just as important, you need a close look at how well the investment suits your needs. A superficial look can steer you in the wrong direction.
From time to time, for instance, investors say “Now that I’m retired, I can’t invest in stocks any more. I can’t risk a 30% to 40% drop in the value of my portfolio.” But these same investors may buy annuities without considering the fact that annuity rates are related to bond yields. Both are at historically low levels. A revival of inflation could do extraordinary damage to the purchasing power you get from the fixed returns on bonds or annuities.
Retirement planning and four key factors to consider when investing for retirement
Retirement planning is the process of setting retirement goals, estimating the income needed to meet those goals and assessing your potential sources of retirement income. These days, more investors suffer from what you might call “pre-retirement financial stress syndrome.” That’s the malady that strikes when it dawns on you that you don’t have enough money saved to be able to earn the retirement income stream you were banking on. The best way to overcome this is with sound investing.
Additionally, here are four key factors to consider for retirement saving:
- How much you expect to save prior to retirement;
- The return you expect on your savings;
- How much of that return you’ll have left after taxes;
- How much retirement income you’ll need once you’ve left the workforce.
Should you consider investment products in your portfolio for retirement?
The financial industry has created income-producing investment products to cater to investors who are wary of stock-market uncertainty. These products can provide steady income that’s higher than bond interest, or dividend yields from stocks. However, these products are almost always subject to hidden fees and risks that continually drain your capital, or leave it vulnerable to unexpected losses.
Successful investors understand that occasional market plunges are normal and unavoidable. A drop of 30% to 40% in stock prices is rare. But after the plunge ends, stocks bounce back and eventually recover. Meanwhile, if you follow our Successful Investor approach, you’ll still have dividend income. What’s more, you don’t need to (and probably won’t) sell at the low in prices.
You can maintain reserves for your cash flow needs by selling some stocks every year, during times of high and low prices.
When stock prices are low, you can also cut your spending, and take less cash out of your portfolio. You probably did something like that during your working years, in times of low income or unexpected expenses.
Planning your portfolio for retirement
Do you expect to deplete all or most of your investment assets before you die? In that case, as time passes, you probably will want to shift some investment assets into cash equivalents, or fixed-return investments with maturities of three years or less. However, consider coming changes in your income needs. Your spending may go down in the latter part of retirement. In addition, you may replenish your liquid capital when you sell your home or other real estate.
Do you think you’ll leave an estate? In that case, you should take the age of your intended beneficiaries into account. For example, if you have adult children in their 40s, it makes little sense to invest for them the same way you invest for yourself.
The complexity of building a portfolio for retirement
Deciding if you’ll hold stocks in your retirement portfolio is a complex question. It depends on your personal circumstances, finances and temperament, and on alternatives available in the investment marketplace.
The worst way to answer the question is to zero in on a single rule of thumb, or the brochure describing an investment product. The best way is to look at a wide variety of information.
Do you plan on holding stocks in your portfolio for retirement or do you prefer income-producing investment products to get more from your retirement portfolio?
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This blog originally ran at TSI on June 23, 2017 and is republished here with permission.