Retirement changes all aspects of life, including investing. When saving for retirement there is an emphasis on return, usually with defined time horizons. Living in retirement shifts the emphasis to income and preservation. With people living longer, portfolio-construction strategies need to be established to guard against inflation, volatility and market declines — the things that can devastate a retiree’s income. Below are two ideas to consider for retirement-income planning that may help mitigate the effects of volatility.
Diversify Your Income Source
A retired investor is still a long-term investor, but one who has likely started to take distributions. Diversification strategies that worked for accumulation in the past may not be suited for distribution in the future. This is particularly true now that the landscape has shifted for interest rates, inflation and volatility. Combining income from multiple sources to create a diversified income stream in retirement can help to reduce the effects of certain risks. Regarding equities, income diversification can come from both negatively correlated — meaning when one asset goes up, the other will often go down — and noncorrelated assets. Correlation is not a constant and can change based on market dynamics and various external factors. Additionally, retirees may benefit from diverse income sources beyond market sensitive assets such as Social Security retirement benefits and income from pension plans.
Create Building Blocks for Income Buckets
There are many ways to build a bucket strategy, but consistency and maintenance are key. One method is to create asset allocation building blocks around the income objective. Bucket strategies, whether allocated by time and/or client objectives, can have the positive effect of helping retirees adopt a mental accounting framework for their assets, making it easier for them to understand, quantify and prioritize their retirement spending and legacy objectives. By diversifying across various asset classes and income sources, retirees may lower their exposure to market fluctuations and reduce the impact of a single economic event on their retirement income. This strategy also encourages retirees to take a comprehensive view of their financial goals, for both the short and long term. By addressing living, lifestyle, emergency and legacy objectives, retirees can create a more holistic and sustainable retirement plan that aligns with their values and aspirations.
In conclusion, periodically review your retirement income plan to ensure that it continues to reflect your objectives. Amid changing market conditions, the plan can help you stay focused on long-term goals rather than short-term market fluctuations.
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Asset allocations and diversification cannot guarantee profit or insure against a loss. There is no guarantee that any investment strategy will be successful; all investing involves risk, including the possible loss of principal.
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