A wise person once said, “With age comes wisdom.” The older we get, the more experience we have to draw on. And that can change our motivations and priorities. When we’re older, we tend to reevaluate some of the decisions we made when younger. And that’s especially true with our outlook on retirement. If you’re nearing retirement age or recently retired, your view of something like investment risk has probably evolved. What does that mean for your retirement plans? What should you do to manage risk and similar age-related factors? Here are a couple suggestions.
Review your asset allocation — and adjust as needed1
In general, older investors tend to shift toward a more conservative mix of investments (i.e., their asset allocation) to manage the risk of the assets they’ll rely on for retirement income. This is because older investors have less time to make up for losses than their younger counterparts.
If your mix of investments is too aggressive for your age, you may be incurring “equity risk,” the risk that a sudden drop in stock values can hurt your retirement income viability. However, if you invest too conservatively, you’re also at risk of inflation eating into your spending power because the rate of growth in your portfolio is lower than the rate of inflation. It’s all about finding the right balance for your age, risk tolerance, and retirement income needs.
Clarify your “spend-down plan”
How will you use the funds in your account as a retirement income source? How will your multiple retirement income sources — such as Social Security benefits, pension benefits, personal savings, IRAs, and your retirement account — work together to provide you with the income you’ll need? How much of your retirement account should stay invested in stocks as your retirement progresses? The answers to these and similar questions are what’s known as a “spend-down plan,” a systematic approach to withdrawing your assets over the course of your retirement. A well-designed spend-down plan can help you minimize your tax obligations while helping you stretch your savings across your entire retirement.
The right formula for managing risk and creating a smart spend-down plan is highly personal. Everyone’s situation is different. If you have questions on these issues and how to make a smooth transition to retirement, schedule some time with your local retirement plan advisor at pennstatehealth.empowermytime.com.
1 Asset allocation, diversification, or rebalancing does not ensure a profit or protect against loss.