4 COSTLY Investment Moves People Miss Before Retirement

When you retire, your investment portfolio’s job changes. While you’re working, you’re focused on growth and building your savings for the future. Once you retire, those investments also need to help support your spending year after year. Your retirement investment strategy should account for that shift.

What Changes When You Retire?

During your working years, you’re still earning a paycheck and contributing to your investment accounts. You have more time before you’ll need to rely on that money for everyday expenses. Retirement changes how you use your portfolio. You may start taking income from your investments instead of reinvesting everything. You also need to consider how much risk you’re taking across all of your accounts and what could happen if the market drops while you’re withdrawing money.

The amount of risk you take, how your accounts work together, the cash you keep available, and even a stock that helped build your wealth may all need another look. Here are four changes to consider as you adjust your retirement investment strategy.

Change #1. Adjust the Risk in Your Retirement Portfolio

During your working years, you have more room to pursue growth. You may even take a few chances on investments you believe have strong growth potential. Once you retire, you don’t have the same luxury. You need that money to last for the rest of your life. Your portfolio may need to shift from maximizing growth toward managing risk. No single allocation works for every retiree. Look at your goals and financial plan to determine how much risk you need to take, without taking on more than necessary.

Create Income From Your Portfolio

Risk isn’t the only factor to consider when adjusting your retirement investment strategy. Your portfolio may also need to start producing income. If you’re heavily invested in growth stocks, such as large-cap technology companies, many reinvest their earnings instead of paying dividends. They may offer growth potential, but they may not provide much income.

A balanced portfolio can include both growth investments and value or dividend-paying stocks. You can hold these investments through individual stocks, mutual funds, or ETFs. During your working years, you may have automatically reinvested your dividends. In retirement, you can have those dividends paid out in cash instead. Think of it as your portfolio paycheck. The income your investments generate can help cover your spending. If you need more income than your portfolio produces, you can cover the difference by selling stocks or bonds.

SEE ALSO: 5 Hidden Retirement Costs That Can Drain Your Savings

Change #2. Look at All Your Accounts as One Portfolio

Another adjustment to your retirement investment strategy is how you view your accounts. It’s common to think about each account separately. You might consider one account your risky bucket and another your safe bucket. Your spouse may also invest very differently than you do. But all of those accounts belong to the same household.

Let’s say John has a portfolio invested in 100% stocks. Sarah has a more traditional portfolio with 60% in stocks and 40% in bonds. Looking at their accounts separately gives you two very different pictures. Put them together, and their household allocation is closer to 80% stocks and 20% bonds. 

The same applies when spouses have very different approaches to investing. One person may be comfortable taking more risk while the other is more conservative. When you combine the accounts, the total household allocation determines how much investment risk you’re taking. Coordinating those investments before retirement can help you avoid discovering during a bad market that your household was taking more risk than you intended.

Watch for Overconcentration Across Accounts

Having accounts in several places can also make portfolio diversification harder to see. You may own large-cap growth in one account and have more of it in another. The same thing can happen with small-cap value, a particular sector, precious metals, or an individual stock.

Each position may look fairly small when you view the accounts separately. Add everything together, and your total exposure could be much larger than you realized. If that company, sector, or asset class falls, the effect on your retirement portfolio may be greater than you intended. Reviewing your investments at the household level can help you see how much you own across every account before a market decline exposes the overlap.

Change #3. Build a Cash Buffer Before Retirement

You don’t want to hold so much cash that a large portion of your money is sitting on the sidelines. Your investments still need to work for you. But keeping 6 to 12 months of living expenses in cash can give you flexibility. One reason is that you may not know exactly what you’ll spend during your first few years of retirement. You could end up spending more than you expected.

A cash reserve can also help when a large expense comes up during a market decline. Say the market is down and you suddenly need a significant amount of money. Rather than selling investments to cover the entire expense while prices are down, you may be able to use some of the cash you already have available.

Your investment portfolio can still provide your regular retirement income. The cash is there more as a rainy-day fund, similar to the emergency savings you kept during your working years. Including that reserve in your retirement investment strategy gives you another source of money to use when an unexpected expense comes up.

SEE ALSO: 6 BIG Retirement Mistakes (And How To AVOID Them)

Change #4. Reduce Large Single-Stock Positions

The last area can be one of the harder adjustments to make. You may have a stock that has grown to represent 20%, 30%, or even 40% of your household portfolio. Maybe you’ve owned the company for years, and the stock played a significant role in building your wealth.

It’s easy to become emotionally attached to an investment like that. It helped get you where you are today. Charlie Munger, Warren Buffett’s longtime business partner, famously said, “You only have to get rich once.”

A single stock may have helped get you where you are today, but you don’t want your retirement depending on one company’s next move. A leadership change or bad headline could send the stock down 20% to 30%, and that’s completely outside your control. A good guideline is to keep any single stock to 10% or less of your overall portfolio. Income is another consideration. If the stock doesn’t pay a dividend, a large percentage of your portfolio may not be generating any income for you. Reducing a concentrated position can be difficult, especially when you’ve held the stock for a long time. But it deserves a closer look as you prepare to rely on your investments for retirement income.

Review Your Retirement Investment Strategy as a Whole

Before retirement, look at your investments across the entire household. Include both spouses and every account when reviewing your overall allocation. One spouse may be comfortable with more risk while the other prefers a more conservative approach, but the combined portfolio determines your household’s overall risk.

Look at your stock and bond allocation, any investments that appear across multiple accounts, large single-stock positions, and the cash you plan to keep available. You don’t need a perfect portfolio. The goal is to avoid major mistakes and not be blindsided by risks you didn’t realize existed. At Paces Ferry Wealth Advisors, retirement planning includes how your investments fit your income needs, spending plans, and long-term goals. Contact us to schedule a conversation about your retirement investment strategy.

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.