Approaching retirement or already there? Here's financial advice from professionals on managing your funds
In retirement, inflation can erode a lifestyle over 20 or 30 years. To combat this, financial advisors employ a combination of strategies to generate predictable income and keep pace with inflation.
One key approach is asset allocation by time horizon. Advisors allocate assets based on when funds will be needed, ensuring capital is available for immediate income needs while investing for growth to support longer-term income.
Treasury Inflation-Protected Securities (TIPS) are another tool used to preserve purchasing power in the fixed income portion of a retiree’s portfolio, providing a layer of inflation protection.
Maintaining one to two years’ worth of expenses in cash or ultra-conservative instruments acts as a buffer against market volatility and reduces the need to sell assets during downturns. However, holding excessive cash is avoided since it loses value relative to inflation.
Income planning is crucial for retirees. Advisors develop customized withdrawal strategies to manage sustainable income, incorporating sources such as Social Security, pensions, and investment assets. They also focus on minimizing taxes via tax-smart withdrawals and Roth conversions to maximize net retirement income.
Risk management over time is another important factor. Contrary to traditional advice, some advisors recommend maintaining or even increasing stock exposure later in retirement once basic income needs are secured. This is because retirees today often need to plan for 30 or more years of income and thus require growth to combat inflation and longevity risk.
Holistic planning is also essential. Retirement financial advisors integrate healthcare and long-term care considerations, estate planning, and tax mitigation into portfolio management to ensure comprehensive income security throughout retirement.
Diversification is key in retirement, ensuring investments don’t all move the same way when markets get rocky. Working with a financial advisor can help create a retirement plan that's built specifically for you and is built to last.
The bucket strategy is a popular approach. It breaks down into four buckets: 0-3 years (Cash or cash equivalents), 4-8 years (40% stocks, 60% bonds), 9-14 years (70/30 stock/bond mix), and 15+ years (All stocks). The strategy provides three years of living expenses covered by the least volatile asset (cash), and eight years covered by stable investments. Each year, the cash bucket is replenished like a waterfall from the other buckets.
The best approach for investment during retirement depends on income needs, risk tolerance, time horizon, and financial goals. Tax optimization is also important, holding different types of assets in the most tax-efficient accounts. For example, tapping taxable brokerage accounts first, then moving to traditional IRAs and 401(k)s, and saving Roth accounts for later years or legacy goals can be a tax-efficient withdrawal strategy.
In conclusion, financial advisors balance safety and growth by diversifying assets (including inflation-protected bonds and equities), maintaining sufficient liquid reserves, customizing income withdrawal schedules, and actively managing taxes and inflation risks to achieve predictable, inflation-adjusted retirement income over potentially several decades.
Investing in Treasury Inflation-Protected Securities (TIPS) is one method used by financial advisors to preserve purchasing power in the fixed income portion of a retiree’s portfolio, offering protection against inflation. Risk management over time is crucial, with some advisors recommending maintaining or increasing stock exposure later in retirement to combat inflation and longevity risk.
Moreover, Income planning is vital for retirees, with financial advisors developing customized withdrawal strategies, integrating sources such as Social Security, pensions, and investment assets, to manage sustainable income and minimize taxes.
