As retirement approaches, managing your portfolio becomes more complex. While younger investors may rely on simple strategies like target-date funds, retirees must take a more thoughtful approach.
David Blanchett, Managing Director at PGIM DC Solutions, highlights three major financial risks that retirees should consider.
The first is inflation, which erodes purchasing power over time. The second is sequence of returns risk, where poor investment performance early in retirement can have long-term consequences. Finally, longevity risk poses a challenge, as longer life expectancy increases the need for a sustainable financial plan.
“Building an efficient portfolio in retirement is more intricate,” Blanchett explains. “You must generate income while addressing different types of financial risks.”
To mitigate these risks, a well-diversified investment strategy is crucial. However, the best allocation varies from person to person, depending on risk tolerance, life expectancy, and financial resources.
Key Takeaways
Retirees face complex challenges in managing portfolios and social security decisions to ensure long-term financial stability.
- Inflation, sequence of returns risk, and longevity risk are the three major financial risks retirees must consider.
- A well-diversified investment strategy is crucial for mitigating these risks, with a balanced portfolio supporting both stability and growth.
- Personalized strategies involving tax-efficient investing, managing longevity risk through Social Security or annuities, and thoughtful social security claiming decisions can enhance long-term financial security.
Find the right asset allocation strategy
Choosing the right mix of stocks and bonds is essential, but relying too heavily on one over the other can lead to challenges.
Blanchett warns that retirees shouldn’t invest solely in stocks unless they are highly risk-tolerant or have significant wealth to absorb potential market downturns. At the same time, bonds alone are not always a reliable diversification tool over long periods, as their risks fluctuate compared to equities.
Finding a balanced portfolio that supports both stability and growth is essential. A well-structured allocation plays a crucial role in risk management for retirement, helping retirees protect their savings while ensuring long-term financial security.
Use tax-efficient strategies
Beyond asset allocation for seniors, retirees should also focus on tax-efficient investing to preserve more of their wealth. Placing assets in the right types of accounts can enhance after-tax returns and make retirement income more sustainable.
Blanchett emphasizes that allocating tax-inefficient assets like bonds into pre-tax accounts and placing stocks in taxable or Roth accounts can lead to better long-term outcomes. This strategy is particularly beneficial for those managing a mix of traditional IRAs, Roth IRAs, and taxable accounts.
If you invest identically across all your accounts, you miss out on optimizing your after-tax rate of return, Blanchett advises.
David Blanchett
Making smart tax decisions can help retirees stretch their savings further, ensuring they can cover expenses and maintain their desired lifestyle throughout retirement.
Manage longevity risk
A critical aspect of retirement planning is ensuring that savings last a lifetime, especially given rising life expectancies.
One effective risk management strategy is delaying Social Security benefits or purchasing lifetime income annuities. By postponing Social Security claims, retirees can secure higher monthly payments, reducing the likelihood of running out of money later in life.
Mike Conrath of J.P. Morgan Asset Management notes that planning for a lifespan up to age 95 can be prudent, particularly for those in higher-income brackets.
“A 65-year-old couple has a 43% chance that one will live to age 90,” Conrath explains, reinforcing the need for careful financial planning.
Personalizing retirement strategies using longevity calculators and planning tools can help retirees better anticipate their financial needs and make informed decisions about managing income.
Assess the social security’s long-term outlook
Social Security plays a vital role in retirement income, and the decision of when to start receiving benefits is crucial.
Conrath reassures retirees that, despite concerns about the system’s future, 79% of scheduled Social Security benefits will still be available for at least the next 75 years even if no legislative changes are made.
Choosing when to claim Social Security affects both monthly income and survivor benefits for spouses and dependents.
Retirees can claim benefits as early as age 62 for a lower monthly amount, or they can delay until age 70 to receive significantly higher payments.
Each choice carries unique financial implications, making it important to weigh personal health, employment status, and additional income sources before making a decision.
“How you play your cards with Social Security matters,” Conrath explains.
Thoughtful timing can help retirees maximize their total lifetime benefits and ensure financial stability for themselves and their loved ones.
Develop personalized investment strategies
Creating an effective retirement portfolio requires balancing risk mitigation with growth potential while preparing for an extended lifespan.
Conrath advises retirees to plan for best-case, worst-case, and middle-ground scenarios, as uncertainties around Social Security and life expectancy can impact financial stability. Using available tools and expert guidance can help retirees adjust their strategies and remain financially secure.
By combining diversified investments, tax-smart asset placement, and strategic Social Security decisions, retirees can build a framework that supports long-term financial security. A personalized plan, rather than a one-size-fits-all approach, is the best way to address the unique financial risks that come with retirement.
The key to a secure and sustainable retirement
Planning for retirement is not just about accumulating savings—it’s about making informed decisions that ensure long-term financial stability. By carefully managing investments, optimizing tax strategies, and making thoughtful choices about Social Security, retirees can create a secure and sustainable future.
While financial uncertainties may arise, those who take a proactive approach and seek expert guidance can navigate retirement with confidence, knowing they have built a strategy that supports both their financial needs and long-term goals.
