04-24-2017 07:20 AM
Content provided courtesy of USAA.
Conventional wisdom says the older we get, the more conservative we should become with our investment accounts.
But only up to a point.
"Being too cautious can be as bad as taking big risks," says Robert Steen, director of retirement advice at USAA. "If you're dependent on investments to cover your expenses, being too conservative could come back to bite you."
Finding the optimum mix for your portfolio is a balancing act. In the ever-changing market landscape, Steen says a 50-50 split between stocks and bonds or other "safe" investments may be a route to consider as you start your retirement countdown.
"If your portfolio is 100% invested in stocks, you may want to review it at age 50 and reallocate some of your retirement portfolio into more stable investments like money market funds, bonds or bond funds of shorter duration and higher quality, and fixed annuities," he says. "At this stage in life, it's time to start positioning your investments to create income that you won't outlive."
Then, when you are a few years away from retirement, do some fine-tuning, depending on your retirement needs and goals. Be sure that you review not only your personal brokerage accounts but also your IRAs and 401(k)s.
Steen also recommends that you consider the following steps:
- Understand your risk needs, capacity and tolerance. There may be a difference between how much risk you need to take in order to achieve your goals, how much risk you could withstand without derailing your retirement (capacity) and how much risk you are comfortable with (tolerance).
- Find your risk tolerance. Ask yourself how much money you can afford to lose without derailing your retirement. Also consider whether your more conservative investments will be able to stay ahead of inflation. If your interest growth doesn't keep up with rising costs, you risk running out of money in retirement.
- Remember some investments don't pay like they once did. There was a time not long ago that certificates of deposit (CDs) paid interest of 8% or better. Now, you are lucky to earn 1%. The same is true of savings accounts.
- Use those dividends. Consider reinvesting stock dividends. Automatic reinvestment means you won't be tempted to spend your dividend checks. And, historically, stocks that pay dividends have appreciated more than other equities.
- Consider an annuity. The truly risk-averse may want to dedicate some assets to a guaranteed annuity. Consider a deferred fixed annuity, or DFA. A DFA can provide stability within a growing portfolio and can be turned into an income stream later as you need it.
- Seek out a pro. As retirement comes closer, it's probably a good time to review your investments with a financial planner. A professional can provide market insight to help you make informed choices.