Investing for retirement involves having sufficient cash invested and also choosing the right investments so you generate income and so your principal balance continues to grow. The right mix of investments can change over time, depending upon whether you have a long ways left to retirement or whether you are currently retired. Once you’ve actually entered into the retirement phase and you have become dependent upon your portfolio to provide you with the necessary income to live, it becomes very important to rebalance your portfolio to meet your retirement income needs.
Rebalancing Your Portfolio in Retirement
High-risk investments typically have a greater potential for you to grow your money because you can earn a better return on your investment money. However, because they are high risk, there is also a chance that you are going to lose money on these investments. Stock purchases, for example, are a high risk investment because an individual stock could make you a lot of money if it goes up in price but you could also lose everything if the stock price falls.
Lower risk investments, on the other hand, may provide you with a smaller rate of return but there is also little chance you’ll lose your investment. Government bonds would be example of a low risk investment because while you might make only a small percentage based on interest rates, your investment is very safe.
It is important to have the right mix of high-risk and low risk investments, and this risk can change significantly over time. In the early years of saving for retirement, for example, it is usually smart to have 60 percent of your investment portfolio in stocks. As you age and have less time to recover from a market slump, however, you’ll want to reduce this amount down to 40 percent in your middle years and then down to 20 percent in your later years.
When you retire, your focus shifts and the main goal is no longer growing your money, although you do want to keep your principal steady or growing so you don’t risk tapping into this money and running out. The focus during retirement, however, is making sure that you have rebalanced your portfolio so you have a steady source of monthly income that you can count on to support you.
When you have retired, it is usually recommended that you keep some of your investment money in cash (around 20 percent is usually a good choice); that you have some real assets; and that you have some stocks for growth (typically around 15 to 20 percent). However, the remainder and the bulk of your assets should usually be designed to produce a fixed income. In fact, many experts recommend having more than half of your retirement account invested in investments that produce a fixed income you can count on month after month.
Fixed income investments to include in your rebalanced portfolio generally include:
- Treasury inflation protected bonds (TIPS)
- Treasury bonds
- Agency bonds
- Corporate bonds
- Securitized bonds
- International development market bonds
- High-yield bonds
You can also consider investing in guaranteed income annuities (although most experts agree these don’t necessarily provide the most bang for your buck) and investing a small portion of your funds in dividend producing stocks so the dividends can provide you with added income during your retirement years.