Retirement planning is a key component in holistic financial preparation for you and your family. However, many people find themselves nearing retirement age with little to show for their many years of work. While it may feel like you are heading toward retirement without the necessary tools in place to provide for yourself, don't panic.
The 4 Phases of Retirement
The good thing about retirement planning is that until the day you retire, you can prepare and optimize, based on the current state of the economy, for potentially greater return. Even if you're over 60, it isn't too late to start. In order to maximize your retirement savings and live the life you desire, implement these strategies:
Diversify Your Portfolio
One of the most important facets of long-term investment success is portfolio diversification. This entails having a portfolio with stocks, bonds and other investments, and then diversifying within each of those categories. This is a hedge against losses, and it is an important strategy to boost performance.
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In conjunction with this, investors should avoid having any more than 3% of their portfolio in any one stock and invest across a variety of industries. This helps increase the likelihood of that your portfolio will continue to perform well even if one stock or one industry is taking a hit in the market.
Diversifying your portfolio is always important for any investor, but more so for those 60 and older. As individuals inch closer to retirement, their focus should shift toward consistent yield and limiting risk. Younger investors may be able to handle higher risk as they have more time to recover from losses. For those approaching retirement, spreading your money across a variety of investments helps to decrease the likelihood of significant loss and may help to increase the stability of your investments as you get closer to the time you need them the most.
Know Your Portfolio’s Standard Deviation
Many investors focus on using their return on investment (ROI) to determine whether their savings are performing as expected. However, this doesn't really tell investors what they need to know about their portfolios.
In fact, the metric of focus should be standard deviation, which depicts the portfolio's risk and how consistent returns have been over time. A low standard deviation indicates greater price consistency than a high one. For context, the relatively low-risk S&P 500 has a 10-year standard deviation of 13.56%, so if you are able to handle this investment losing 13.56% at any given time, you can safely invest in this sector.
If you have a financial adviser, they can help you calculate your portfolio’s standard deviation and provide you with a forecast of potential routes to achieve a lower standard deviation with the same return. There are also a number of online resources to calculate your standard deviation, such as Yahoo! Finance, Seeking Alpha and Morningstar.
Be Cognizant of Inflation
Inflation is something that investors have little control over, but there are ways to mitigate it. The big concern is when inflation is high, it will overtake investment gains. According to a recent study from Global Atlantic Financial Group, 71% of retirement age investors are concerned about the impact of inflation on their savings. And while inflation may be resolved within the foreseeable future, in similar fashion to the importance of diversifying your portfolio, investors 60 and older have less time to recover from their losses and need to be aware of the way in which inflation may affect their retirement investments in the short term.
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To protect your investments, avoid investing in many long-term bonds, which are most susceptible to inflation. Additionally, identify investments that have pricing power (i.e., they can change their prices quickly), which helps naturally protect their value from inflation. Short-term bonds and investments with high pricing power are two key ways to protect your investments from inflation.
Focus on High-Yield Performers
In order to maximize your portfolio close to retirement, you must focus on high-yield performers. This includes items like real estate investment trusts, covered calls and alternate investments, to name a few. These will allow you to grow your investments more rapidly as you approach retirement age.
Likewise, you should be focusing on investments that have a moderate dividend yield, which can potentially allow you to live off of dividend income and leave the bulk of your investments in the market. A recommended target for dividend yield is 2.5%-5%, as higher dividend yields will take more money out of the market that can grow during upturns.
Avoid Annuities
A well-known tool for many retirees is the annuity, which guarantees a regular income stream for a certain number of years. While this seems like an easy solution, there are particular complexities that come with investing in annuities. Some annuities may come with high commissions and fees, and while there are a variety of low-cost options, investors need to be aware of the underlying costs and stipulations that can alter your investment contracts at any point.
Another notion to consider when investing in annuities is that your return may be much lower than that of your stock investments, and even lower after your fees are paid. While avoiding annuities entirely may not be necessary for all individuals, especially those with higher net worth or those whose advisers pay close attention to the details of their investments, it may be a safer option to steer clear for the average investor at this age.
Get Started: Know Your Spending Habits and Embrace Technology
Once you have all your investments nailed down, it’s time to buckle down and focus on saving and budgeting. When it comes to retirement planning, the first thing you have to be aware of is how much you’re spending now and how much you will need to spend during retirement. You should consider having an emergency fund, eliminating debt, evaluating recurring costs, such as health insurance, and understanding your taxes to ensure that you are not left unprepared.
The good news is that there are plenty of resources available to help you with this step. Take advantage of technology to do thorough planning. There are many online tools at your disposal to help you calculate how much you need to save for a fulfilling retirement, like AARP’s retirement calculator, for example.
When retirement arrives, you don't want to be left concerned about how you'll finance the remainder of your life. Maintaining a consistent focus on planning prior to and during retirement will help you be prepared. More importantly, taking advantage of the time you have to prepare now is the best tactic you can use to ensure an enjoyable, financially secure retirement future.
Disclaimer
Securities and investment advisory services offered through Royal Alliance Associates, Inc. (RAA) member FINRA/SIPC. RAA is separately owned and other entities and/or marketing names, products or services referenced here are independent of RAA.
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