Retirement marks a significant turning point in life, especially for those who have spent years accumulating assets and building a comfortable financial cushion. But no matter how careful you are about saving, there’s always the chance that something could happen to your money.
As you progress to retirement, the importance of shielding and cultivating the wealth you’ve worked hard for only accelerates. Here, we will delve into key strategies that can help retirees and pre-retirees navigate risk and help secure their financial future. Here’s what you need to know.
Tailoring Risk Tolerance to Your Stage of Life
A recent TIAA study reveals that over half of American adults lack awareness of the typical duration of retirement years. So understanding your savings goal and the level of risk you’re willing to take to get there is a crucial step of retirement planning.
Risk tolerance changes when retirees shift from the accumulation phase to the distribution phase during retirement. Your risk tolerance is mostly lower when you’re younger, allowing you to take a more aggressive investment approach as you have time to return from losses. But as you get closer to your golden years, you should switch from aggressively investing to a more conservative approach.
It’s important to assess your risk tolerance based on your financial goals and adjust your investment strategy accordingly. Working alongside a financial advisor can help you align your portfolio with your level of risk.
Embrace a Long-Term Perspective
During retirement, it’s essential to maintain a long-term perspective on investments. Markets may experience short-term fluctuations, but history shows they tend to recover over time. A great example of markets fluctuating was when we entered a bear market in 2022. The S&P 500 dropped 20%, and it left many wondering if they would be able to retire.
Many investors have a tendency to panic during volatile phases like these, selling certain investments to avoid further loss. But even though panic may set in initially, the markets usually remain resilient. This is why while cautiously modifying your strategy can be beneficial in certain circumstances, always consult with your trusted advisor first to help you avoid making emotionally-led decisions based on momentary market movements, which could lead to missed opportunities or unnecessary losses.
You might also consider incorporating defensive investment approaches into your strategy. For example, bonds are generally less volatile than stocks and can provide a more stable income stream. Dividend-paying stocks can also be a valuable addition, offering both potential for growth and consistent dividends.
Help Guard Against Inflation
Savings play a pivotal role in maintaining your financial well-being, but what happens when you look down the barrel of inflation?
Inflation’s impact on purchasing power holds substantial weight, especially during retirement. As of July 2023, the inflation rate experienced a notable uptick of 3.2% compared to the previous year. To help mitigate the effects of inflation, retirees should explore alternative investment avenues. Here are a few options to consider that could help safeguard your assets against inflation:
- Gold
- Commodities
- Stocks and Bonds
- Real Estate
- Leveraged loans
Retirees can help strengthen their finances by incorporating these alternative investments into their portfolios, helping to ensure the longevity of your monetary resources throughout retirement.
Keep Your Investments Diversified
The need for a diversified investment approach becomes even more prominent as you close in on retirement. A well-diversified portfolio can help protect against the potential impact of market volatility, economic downturns, or unforeseen events that might disrupt the economy.
Diversification is the foundation for any investment strategy. A well-rounded and diversified portfolio should include various asset classes spread across multiple sectors and regions. This strategy helps minimize risk by avoiding over-reliance on any single investment and enhancing the potential for steady returns over time.
By partnering with an experienced Fiduciary advisor, you can help protect your wealth with greater stability and less uncertainty.
Don’t Forget About Taxes
In addition to these investment considerations, it’s important not to overlook taxes and their impact on your retirement. Your portfolio will likely have a mix of taxable, tax-deferred, and tax-free investments. Each type of investment comes with its own tax treatment, affecting how much you’ll owe in taxes when you withdraw funds.
- Taxable Investments: A regular brokerage account holds investments like stocks, bonds, and mutual funds. Gains from these investments can be taxed. This can vary based on how long you’ve held the asset. Planning when and how to sell these assets can help you manage your taxable income in retirement.
- Tax-Deferred Investments: Accounts like Traditional IRAs and 401(k)s offer tax-deferred growth. While contributions to these accounts are tax-deductible during your working years, retirement withdrawal is taxed as ordinary income. Strategically managing withdrawals can help you control your tax liability.
- Tax-Free Investments: Roth IRAs and Roth 401(k)s provide the benefit of tax-free withdrawals in retirement. Contributions to these accounts are made with after-tax dollars, but qualified withdrawals are tax-free. Leveraging these accounts can help you create a tax-efficient income stream.
Working with a Fiduciary advisor can help you understand the tax implications of different strategies and align them to work with your overall retirement goals.
Seeking Professional Guidance
Navigating investments, especially on your road to retirement, can be challenging. Working with a dependable advisor can help offer peace of mind along with helping you make financially wise choices. Utilizing the experience of our Fiduciary advisors can help provide the following:
- Regularly reviewing your investment portfolio and ongoing performance evaluation.
- Assessing whether your investments align with your financial goals.
- Helping to ensure your portfolio maintains its intended asset distribution through timely adjustments.
Working with Fiduciary advisors like the Johnson Wealth and Income Management team can help provide valuable guidance and support around your investment and asset preservation strategies. We aim to provide unbiased advice in harmony with your financial goals and needs, providing you with impartial advice whenever you need it most.
Final Thoughts
For retirees, preserving investments and understanding risk are vital parts of a successful retirement plan. You should navigate market fluctuations to help safeguard your wealth by leveraging defensive investment strategies. Remember, the key is to balance preserving your wealth and allowing it to grow in a way that aligns with your financial goals.
At Johnson Wealth and Income Management, our Fiduciary-led firm is committed to helping Iowans achieve a stable financial future. We understand that diving head-first into the investment world can be daunting. If you have investment questions or want further information regarding our services, schedule your complimentary consultation here today.
All written content on this site is for informational purposes only. Opinions expressed herein are solely those of Johnson Wealth & Income Management and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. Investing involves risk. There is always the potential of losing money when you invest in securities. Asset allocation, diversification and rebalancing do not ensure a profit or help protect against loss in declining markets. All information and ideas should be discussed in detail with your individual advisor prior to implementation. The presence of this website, and the material contained within, shall in no way be construed or interpreted as a solicitation or recommendation for the purchase or sale of any security or investment strategy. In addition, the presence of this website should not be interpreted as a solicitation for Investment Advisory Services to any residents of states where otherwise legally permitted to conduct business. Fee-based financial planning and Investment Advisory Services are offered by Sound Income Strategies, LLC, an SEC Registered Investment Advisory firm. Johnson Wealth & Income Management and Sound Income Strategies LLC are not associated entities. Johnson Wealth & Income Management is a franchisee of the Retirement Income Source. The Retirement Income Source and Sound Income Strategies LLC are associated entities. © 2023 Sound Income Strategies.
