In an environment marked by continuously rising inflation
data, rapidly rising interest rates and freakishly low consumer sentiment,
aspiring retirees have every reason to feel uneasy about the coming years.
While a recession is by no means a guarantee, we are starting to see hallmarks
of what could be a protracted period of economic slowdown. However, retirements
will happen regardless, and it's best to understand how to manage such a period
should one come to fruition.
Let's recap a few easy but impactful ways to shore up your
retirement portfolio, including consolidation, moving away from single stocks,
recommitting to index funds and building up a cash reserve.
Consolidate where possible
If you have old 401(k)s, IRAs or other accounts at different
institutions, retirement is a great time to merge similarly taxed accounts and
commit to one or two financial institutions. Not only does this cut down on
paperwork, tax forms and passwords, but it's far easier to manage your
investment and tax picture when you can see the whole thing from a single
bird's-eye view.
This is more than just administrative. If you have accounts
scattered across institutions, it's likely that you're holding a few
high-expense funds or paying excess management costs somewhere. These high
costs can eat into your investment returns, leaving you with less than you
could otherwise have to enjoy in retirement.
You could shore up your retirement portfolio through
consolidation, moving away from single stocks, recommitting to index funds and
building up a cash reserve.
Move on from single stocks
If you have small single-stock positions as part of your
wider portfolio, it's now a great time to move on from them. Single stocks
carry company-specific or "idiosyncratic" risk, which is the inherent
risk associated with holding shares of a single company. You can remove this
risk by committing to portfolio diversification and focusing on the factors you
can control, like how much you save and coming up with an appropriate asset
allocation.
Further, since the broad market has corrected more than 20%
year to date, there's a good chance you'll owe less in capital gains tax if you
decide to move out of your single positions now. This is, of course, dependent
on which single stocks you own, but if there was ever a time to rebalance out
of them, that time has likely arrived.
Recommit to index funds
Index funds do quite a bit for retirees. They help keep
costs low, which has shown to be a major factor in keeping more of your
investment returns. Perhaps most importantly, index funds help you reduce the
time spent managing your portfolio, which in retirement could not be more
valuable. Simply selecting a fund that tracks the S&P 500 and a fund that
tracks the total bond market may be enough for you.
Taking a 10,000-foot view of your portfolio and allocating
investments to diversified index funds will likely produce a return close to
the market's overall return, which tends to be higher than the majority of
active investors. Passively accepting the broad market return instead of
picking single stocks is likely to be the right call in the way of tax- and
time-efficiency, so consider a hands-off approach as you enter retirement.
Establish a cash reserve
Even with unusually high inflation numbers, cash is still
king -- especially in bear-market economies. Although inflation will reduce
purchasing power on low-yielding investments like cash, you'll still need a
healthy reserve fund to cover unexpected emergencies.
Relying on the stock market to cover out-of-nowhere expenses
is a risky proposition in retirement. Conversely, knowing you have a reasonable
cash reserve in the event of calamity provides a great deal of psychological
comfort. Having an accessible, fully liquid, high-yield savings account is the
best home for this section of your portfolio. There's no need to get creative
with a brokerage account.
Tighten up your financial life
The more scattered your life is going into retirement, the
more time you'll spend making sense of it, and the more stress you're likely to
encounter. Take the months leading up to retirement to ensure you are doing
everything you can to make your life as easy as possible down the line. By
consolidating your investments, moving on from single stocks, recommitting to
index funds and establishing a cash reserve, you'll be doing what you can to
ensure a peaceful experience in retirement.
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