“You may no longer work at a job, but you still have to work at your investments.”
Your personal savings and investments are the cushion between you and perhaps a limited lifestyle. Smart retirees know that their “cushion” needs a regular fluffing, with constant attention to goals, allocation, diversification, and risk. How long since you took a look at your portfolio to make sure your money’s working as hard as it can be?
How long since you made your investment choices? Without plenty of forethought and careful tending, portfolios can go awry. For instance, when you picked your investments, did you take diversification into account? Did you have a strategy for deciding how much of each investment to buy? Have you added new investments over time? Do these choices still reflect your current intentions? Keep these key investment ideas in mind:
- Diversification: Choose diverse foods from a menu and you're an adventuresome diner. Choose diverse investments and you're just plain smart. Investors are diversified when they have money invested in at least three investment classes – stability of principal, income, growth & income, growth, aggressive growth, and global/international. You allocate a percent of your savings to different investment classes. Your investments perform based on factors such as interest rates, industry trends, economic conditions, the value of the dollar, etc. The same factors (for instance, rising interest rates) may affect different investments differently. Results in one sector tend to offset those in another. For example, when growth investments do well, income investments may lag. Be aware, though, using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss in declining markets.
- Allocation Strategy: Deciding where to place emphasis is what asset allocation is all about. It's based on your personal interests, and situation, your time of life , and your risk tolerance. As a retiree, you may want to put emphasis on creating income. So, you might allocate a healthy portion of your assets to bonds, income-oriented stocks, and CDs. That’s okay for emphasis, but smaller chunks of your money should be held in (perhaps) a plain old bank account, so you can easily get cash. You also may want to put a small chunk of money into a longer-term investment with appreciation potential so you have potential growth to cover cot-of-living increases, increased medical costs etc.
- Risk Management: As a retiree, you probably want to hang onto the savings you’ve got. Fair enough. Perhaps you’ve even allocated the majority of your savings to stability of principal. That may be appropriate. Just remember, though, risk is not all bad. In return for a little investment risk, you may be able to reap a little more investment reward. Generally, retirees’ portfolios tend to be less risky than younger savers’. Your portfolio doesn’t have decades to bounce back after a down market. So, for example, if you were an aggressive investor before retirement, perhaps you’d have more comfort as a moderate investor. Inflation can eat up returns. Let’s say you hold most of your savings in a bank account earning a modest return. By the time you factor in inflation … for example, in the 3-percent range … you may not have gotten ahead at all. Strong investment performance can have the unintended result of exposing you to more risk.
Once you complete your portfolio review ask yourself, what did it turn up? Are you satisfied with your current selections, or is it time to move investments around? For example, maybe you’d benefit from moving some money to become more diversified, or to address too much or too little risk. Here are some steps you can take. “Reallocate” means you want to take existing savings and invest them differently. “Rebalance” means you want to keep your money in the same investments, but change the percent of money devoted to each. And, “convert” tells more about how to turn savings into income. Some potential options are:
- Reallocate: Here's the part where we deliberately choose investments. Notice, though, that I use the words "cherry picking." This is to remind you to be selective. You need to stick to your asset allocation shopping list … by choosing several investments from your preferred asset class. Here's another important point. Remember to diversify. For instance, if your asset allocation strategy is to devote 50% of your portfolio to income-oriented investments, select several different income-oriented investments. Here's what to look for:
- What's the investment's objective? Is it aiming to produce income, preserve capital, or produce growth?
- What are the investment's holdings? What types of companies? What types of financial instruments? What parts of the world?
- What is the investment's historical performance? Has its value increased or decreased over time? How has it performed compared to like investments? How has it performed compared to indices, such as the S&P 500? Keep in mind an investment’s historical performance is not indicative of future results.
- Rebalance: Sometimes a single investment can "mushroom" if it performs particularly well. The problem is that it then becomes bigger in relation to your other investments, putting your account out of balance. It’s smart to review your investment allocations at least annually to ensure they’re still tracking with your risk preferences.
- Convert to Income: You’ve been saving for decades and now it’s time to spend. Too bad your retirement savings aren’t housed in a handy cash dispenser. Wouldn’t it be great to pop in your debit card and take as much as you need? Just kidding, of course, getting income and doing it right takes a bit of work. Here’s why:
- Not all investments are set up to pay income.
- Investments should be cashed out in a certain order to preserve tax benefits.
- Proceeds from a liquidated investment shouldn’t necessarily be held in a bank savings account.
- Take too much today, and you might not have enough for tomorrow.
- Monitor Annually: Investments are in constant motion, so you need to keep up. At least once a year, it’s smart to schedule a portfolio review. Ask yourself:
- Are asset allocation and investment choices still in keeping with my preference?
- Are my investment returns beating inflation?
- Am I taking too much, or too little risk?
- Are my income withdrawals depleting principal too quickly?
- Do I need to liquidate to replenish my sources of short-term or emergency funds?
- Is my account in balance?
Need some help with your investments?
A financial professional can help you with your individual situation. You can speak to your current local financial professional or speak to an ING representative by calling 877-665-8544.
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