Retirement Redefined: A Balanced Investment Portfolio For The Over-65S

A retired 65-year-old's investment portfolio should be tailored to their financial goals, risk tolerance, and capacity. Generally, a balanced approach is recommended, with a mix of stocks, bonds, and cash investments to generate income and preserve capital.

- Income generation and capital preservation become more important than aggressive growth.

- Consider a moderate portfolio allocation, such as 60% stocks, 35% bonds, and 5% cash/cash investments.

- Focus on dividend-paying stocks and stable, low-earning funds like bonds and money market funds.

- Have enough cash on hand to supplement regular income from annuities, pensions, and Social Security.

- Keep some funds in short-term, liquid accounts, such as certificates of deposit or money market funds, to cover living expenses during a downturn without selling stocks.

- Review your asset allocation periodically and make adjustments as needed, especially if your risk tolerance or financial goals change.

Stocks and bonds

Asset Allocation:

The traditional rule of thumb for asset allocation has been to subtract your age from 100 – this would give you the percentage of your portfolio that should be allocated to stocks. For example, at 65, you would keep 35% of your portfolio in stocks. However, with increasing life expectancies, some financial planners suggest that the rule should be closer to 110 or 120 minus your age. This adjustment accounts for the need to make your retirement funds last longer, and stocks provide extra growth potential.

Types of Stocks:

When allocating your stock investments, consider a mix of value, growth, and dividend-paying stocks. Value stocks are those that are considered undervalued and have the potential for significant gains. Growth stocks are those that are expected to increase in value over time, providing long-term growth potential. Dividend-paying stocks, as the name suggests, pay out regular dividends, providing a source of income.

Types of Bonds:

Bonds typically become a more significant part of your portfolio as you approach retirement. Government or municipal bonds are considered stable investments, offering lower returns than stocks but providing a hedge against stock market volatility. Bond funds, such as high-yield corporate funds or municipal bond funds, can also be a good option for retirees, offering a mix of government, municipal, or corporate bonds.

Diversification and Risk Management:

Diversification is essential to managing risk in your portfolio. Consider investing in a range of industries and sectors to reduce the impact of market downturns in any particular area. Additionally, re-evaluating your risk appetite as you approach retirement is crucial. You may want to consider less volatile investments to protect your principal and ensure regular income.

Income Generation:

Income generation becomes a priority in retirement. Dividend-paying stocks and bond funds can provide a steady source of income. Money market funds, bank certificates of deposit (CDs), and high-yield savings accounts are also options for generating income with relatively lower risk.

Bucket Approach:

The bucket approach to investment portfolio construction involves separating your assets into different "buckets" based on your anticipated income needs and time horizons. For example, Bucket 1 may contain six months' to two years' worth of living expenses in cash instruments, while Bucket 2 may include 8-10 years' worth of living expenses in bonds. The remainder of your portfolio can be invested in stocks and high-risk bond funds.

In summary, a 65-year-old retiree's investment portfolio should include a balanced mix of stocks and bonds, with a gradual shift towards more conservative investments. Diversification, risk management, and income generation are key considerations when constructing your portfolio.

Emergency funds

The general rule of thumb for emergency funds is to have three to six months' worth of living expenses set aside. However, retirees may want to put aside a larger sum, perhaps closer to one to two years' worth of expenses, to account for potential market downturns. This larger sum can provide a cushion, allowing retirees to wait for more favourable market conditions before selling their investments.

There are several options for where to keep emergency funds. A basic savings account or checking account is a good choice as the money is easily accessible and there is no risk of losing the principal. While interest rates on these accounts are typically low, some high-yield savings accounts can offer more competitive rates. It is important to be mindful of withdrawal limits to avoid penalties and preserve savings.

Money market accounts are another option, offering flexibility with check-writing or debit features and potentially higher interest rates. For those with larger balances, a no-penalty CD (Certificate of Deposit) can be a good choice, offering slightly higher interest rates than savings or money market accounts.

Some financial advisors suggest keeping emergency funds in stock mutual funds, but this option carries the risk of losing money if the market corrects and the funds are needed during that time. Therefore, it may be more appropriate to include stocks/mutual funds as part of general retirement accounts rather than emergency funds.

It is also worth considering a Roth IRA as a place for emergency funds. Contributions can be withdrawn at any time without penalty, and there are no taxes on earnings. However, there are restrictions on withdrawing earnings, and income requirements must be met to contribute.

While retirees may no longer need to worry about job loss, unexpected costs can still arise, such as medical expenses or home improvements. A well-prepared emergency fund can provide peace of mind and help retirees maintain their financial stability during retirement.

Risk and reward

However, it is important to note that retirees may also have more financial resources to invest compared to younger investors, who often have less income to invest. As a result, retirees may seek a balance between preservation and growth in their investment portfolios. This involves managing risk while ensuring their savings last for the duration of their retirement, which could be 20 to 30 years or more.

One way to manage risk is to ensure you have enough cash on hand to supplement your regular annual income. This can include keeping a year's worth of spending cash in a safe, liquid account, such as an interest-bearing bank account or money market fund. Additionally, having two to four years' worth of living expenses in short-term bonds, certificates of deposit (CDs), or other liquid accounts can provide a buffer during a market downturn.

When it comes to the asset allocation of your portfolio, a common strategy for retirees is to have a mix of stocks and bonds. The 60/40 portfolio, for example, consists of 60% stocks and 40% bonds, cash equivalents, and other fixed-income investments. The stock portion typically includes a mix of value, growth, and dividend-paying stocks, while the bond portion provides stability and income generation.

Another strategy is to build a bond ladder by purchasing bonds with staggered coupon and maturity dates, which can help even out your portfolio's yields and provide a steady income. Including dividend-paying stocks in your portfolio can also provide a regular income stream while allowing your principal to remain invested for potential growth.

As a retiree, it is important to periodically reassess your investment risk appetite and adjust your portfolio accordingly. While a more conservative approach may be warranted as you advance into your retirement years, it is crucial to strike a balance between preservation and growth to ensure your savings last.

Income sources

When planning for retirement, it's important to consider all your sources of income to ensure you don't run out of money. This includes guaranteed income streams such as annuities, pensions, and Social Security benefits. These sources can provide a significant portion of your retirement income, so it's essential to factor them into your overall financial plan.

Social Security benefits, in particular, can be a crucial component of your retirement income. Most individuals will rely on these benefits to cover their basic living expenses during retirement. It's worth noting that the age at which you can start receiving these benefits varies, depending on when you were born. For those born between 1951 and 1959, you'll need to be 73 years old, while for those born in 1960 or later, the eligibility age is 75.

In addition to these guaranteed income sources, you should also consider the income generated from your investment portfolio. This includes dividends from stocks, interest from bonds, and returns on other investments. The key is to balance income generation with growth potential to ensure your portfolio lasts throughout your retirement.

• Dividend-paying stocks: These stocks provide a regular stream of income through dividend payments. They also allow your principal investment to remain invested, offering the potential for capital appreciation.
• Bonds: Bond funds can provide a stable income stream, especially government or municipal bonds. While they may offer lower returns than stocks, they provide stability and can hedge against stock market volatility.
• Money market funds: These funds are known for being low-risk and highly liquid, making them easily accessible. They typically have high credit quality and short maturities, making them a good option for retirees.
• Bank certificates of deposit (CDs): CDs offer higher interest rates than other deposit accounts, allowing you to lock in a fixed rate for a specific period. However, early withdrawal may result in penalties.
• High-yield savings accounts: In the current environment of high-interest rates, financial advisors recommend considering high-yield savings accounts. These accounts offer variable interest rates above 4% at many banks, providing meaningful returns with limited risk.
• Annuities: Annuities can provide a guaranteed stream of income, especially in volatile economic conditions. A fixed index annuity can guard against market losses and ensure your principal remains intact.

Asset allocation

The traditional rule of thumb for asset allocation has been to subtract your age from 100 and use the resulting number as the percentage of your portfolio that you should keep in stocks. For example, if you're 30, you should keep 70% of your portfolio in stocks. However, with people living longer, financial planners now often recommend using 110 or 120 minus your age. This higher proportion of stocks is intended to provide the extra growth that will be needed to make retirement savings last longer.

In your 60s, your portfolio will start to move from more aggressive to more conservative. At this stage, it is recommended to have a moderate portfolio, such as 60% stocks, 35% bonds, and 5% cash/cash investments. As you enter your 70s, you may want to shift to a moderately conservative portfolio, such as 40% stocks, 50% bonds, and 10% cash/cash investments. Finally, in your 80s, a conservative portfolio is recommended, such as 20% stocks, 50% bonds, and 30% cash/cash investments.

It is important to note that asset allocation should be based on individual circumstances and risk tolerance. Some investors prefer a more aggressive approach, while others value stability. Life situations, such as caring for a parent or funding education, will also affect how much an individual can save and their risk appetite.

Additionally, retirees can benefit from having a mix of income-producing stocks and fixed-income investments, such as bonds, in their portfolios. This mix can provide a steady stream of retirement income while also preserving capital.

Frequently asked questions