It is quite funny to read all those articles about investing when you are accumulating wealth. There are tons of them on how to build and grow your portfolio. However, it becomes more complicated when you search for articles about managing a retirement portfolio. You work your whole life and you put money aside. Then, one day you finally quit your job for good and retire. Congratulations! You did it! You are now free to do whatever you want, whenever you want. You can travel, eat out and achieve all the items on your bucket list (Such as waking up at 9am on a Monday without being judged.)
However, this great feeling of freedom only last for a while. You receive your financial statements and you realize that no money has been deposited in your bank account. The only money that came through comes from a withdrawal from your investment account. You then hit a wall. You are not “generating” money anymore. You are withdrawing it. How can you plan your retirement portfolio, so you don’t outlive your money? So that you still have cash at the age of 85 and will be able to pass a part of your nest egg to your heirs. To help you going through this difficult process, I’ve outlined 4 steps to manage your retirement portfolio.
01 Know Your Spending
This step seems obvious at retirement, but there is nothing more important than knowing how much you need to retire. During your first 10 years of retirement, you will most likely be busy fulfilling all your wildest dreams. Depending on how much you save and your health, you will be able to do lots of activities, hobbies, projects you wanted to complete for a long time. You may need to plan extra withdrawals for your most important retirement projects.
Once you have completed a regular budget, project yourself in a few years from now. It’s one thing to have an idea of how much you will need for groceries and to pay utility bills, but it’s another to know how much you will need to replace your car or your windows down the road. During your active life, those kinds of expenses could have easily been financed through a loan. At 60, I’m not sure you want to enter in a 5 year $20K loans for your car. Do you prefer to pay cash for your next car and avoid interest? This is also a way of investing. If you save 6% in interest fees because you pay cash, it’s like having $20K making 6%… and this revenue is tax free!
02 Know Your Risk Tolerance & Your Situation
I always say that the best investment strategy is the one that helps you sleep at night. If you wake up in the middle of the night because your portfolio lost 5%, you may not have the right portfolio. Answering a risk tolerance questionnaire could help you decide your asset allocation. However, there are things a simple questionnaire (you probably answered a hundred times during your active life) can’t answer.
The problem with those questionnaires is that nobody will tell you something very important: maybe you can’t afford a secure portfolio. Imagine that you have piled up $400K for your retirement, but you need $30K per year to live. Withdrawing 7.5% of your portfolio is not viable if you invest solely in fixed income products (bonds and certificate of deposits) generating a 3% revenue. In this kind of situation, you will definitely outlive your money.
If you want to avoid this situation, a few solutions are available:
Get a sideline. If you don’t retire completely, you will continue to generate extra income that will help fill the gap between what you need to live and what your retirement portfolio can generate.
Retire later. If you keep working an extra 3-5 years, you will save additional money and your 400K will continue to grow before you start withdrawing. But who wants to retire later?
Increase risk – change your asset allocation. According to financial theory (and common sense), if you increase your proportion of equity (stocks) in your portfolio, you are likely to get better returns. Therefore, if you go from a 100% fixed portfolio to a 65% fixed and 35% equity, chances are you will improve your return and you may be able to achieve your retirement plan without having to wait.
03 Plan Your Withdrawals
There is nothing more frustrating and scary than withdrawing during a market drop. Your portfolio drops by 10% and then you have to take an extra 5%? Then, are you cashing your dividend? Dripping? Selling shares? If so, which one? This is getting quite complicated! On my side, my plan is simple but effective.
I would keep one year’s worth of money in cash. Financial history has shown that most market correction lasts about 18 to 24 months. In an ideal world, I would keep 2 years worth of cash to cover the whole period, but that is a lot of money that is not “working” to cover for that. This is why I think 1 year is enough considering that I’ll be cashing my dividend on top of it.
Once I get ready to withdraw more money, I’ll sell shares of companies to rebalance my portfolio. I don’t really mind if they are making money or not. I just want to make sure I get the same asset allocation throughout my retirement. This is the way I know my portfolio is never more at risk toward a single stock or specific sector.
04 Review, Rinse & Repeat
In an ideal world, I think the first thing you should do as a young retiree is to meet with a fee-based financial planner. It will cost you between $1K and 2K to get a complete retirement plan that will include an investment strategy, tax optimization tips and withdrawing plan. What I like about those fee-based guys is that they are professionals without an incentive to sell you something. Therefore, you are sure you get non-biased advice.
Once you get your plan, it’s crucial to review it on a yearly basis. Maybe you spent more, or your portfolio is doing better than expected. It’s important to plan what is coming so you don’t fall short in a few years from now.
Most importantly, if you have a robust plan, don’t change it! If your portfolio is behaving according to plan and you have enough to support your retirement, don’t try to gamble part of your money in a risky play. Keep your head down, focus on your target and enjoy retirement!
You want more? I’m hosting a webinar!
Since I received lots of requests to build “high income” portfolios, I decided to give it a try. I was able to build a portfolio showing a 4.50-5% yield with a minimum of dividend growth to cover inflation (and more). Therefore, you could use this portfolio with a “4% withdrawing rules” and you should be good to never take money away from your capital. I’ve also avoided investing more than 20% in a specific sector. This ensures a strong diversification to go through any kind of crisis.
When I built those portfolios, I made sure to make it bulletproof and avoid 4 investing mistakes many retirees make. If you are 50+ and aim at managing a robust portfolio for your retirement, I’ll be hosting a free webinar this week to help you out! We will discuss the major pitfalls you must avoid as a retiree because the whole investing game changes when you start living off your retirement. I will also explain you how to avoid them and make your portfolio “recession proof”. I wanted to make sure everybody had the chance to see it live and ask their questions. For that reason, I’m hosting this webinar this Thursday…
REGISTER TO THE WEBINAR HERE
Topic: 4 Investing Mistakes Retirees Must Avoid
Date: Thursday, July 26th at 1pm EDT
Description:
- This webinar is for retirees or investors who are about to retire in the upcoming years. We will discuss mostly high yielding investment strategies and pitfalls to avoid.
- You must register with Webinar Ninja to attend (if you did it in the past, no new registration is required). This is completely free and the webinar is free also. Webinar Ninja is the platform we use to run all our webinars. It works well and provide an optimal experience for everybody.
- The presentation is about 30 minutes.
- There will be a Q&A session of about 25-30 minutes.
- The webinar works on Google Chrome or Safari from a laptop or computer. (not compatible with smartphones or tablets)
- If you can’t make it on time, there will be a full replay available, but you must register to access it.
Register here
Prepare your questions. Our webinar presentations are about 25-30 minutes long. The rest of the hour is dedicated to your questions. We can discuss stocks, strategies or any economic events. I’ll be happy to help you anyway I can.
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