Preparing Your Portfolio for Retirement

School of Financial Wellness

A defensive portfolio represented by dominos leaning against a stack of coins.

Balancing risk with expected returns is one of the most important considerations when crafting a successful investment portfolio. The returns you need and the risk you accept are highly dependent on your goals, personal preferences, and stage of life.

As you age, many things change including your financial goals. Moreover, the transition into retirement can significantly alter your needs and your feelings about market volatility. In response to these changes, it often makes sense to shift your portfolio to defense as you near retirement.

What is a Defensive Portfolio?

When investors think of shifting their portfolio to defense, they often imagine investing in cash or safe haven assets like gold. However, these are not the only methods for protecting your funds, nor are they even the typical suggestions made by experienced financial advisors.

Shifting to a defensive portfolio could mean moving some funds away from higher-risk asset classes, adding income producing assets like bonds, or improving diversification to reduce overall portfolio risk. All these actions are undertaken with the same goals in mind – preserving your principal and generating the income you need.

Why would an investor want a defensive portfolio during retirement?

Retirees often have different financial goals than working adults. As such, their portfolios should reflect these differing needs. Often, a defensive portfolio can help retirees generate the income they need while reducing risk.

Retirees Typically Need Their Investments to Generate Income

During their saving years, investors often work with a financial advisor to determine how much they need to save to fund the retirement of their dreams and invest aggressively to reach that threshold. If this description applies to you, your primary goal during this time was asset growth.

However, most retirees rely on their investments for a large portion of their retirement income. Therefore, their goal shifts from growth to income as they enter retirement. Since different types of investments provide different benefits, an income-focused allocation is typically different from one focused on growth. Often, an income-focused portfolio is defensive by nature.

Retirees Often Have a Lower Tolerance for Risk

An aggressive approach to investing is often appropriate during your saving years because you have many years to withstand the ups and downs of the markets. With decades before needing to access your retirement savings, short-term losses are more palatable, and a higher-risk portfolio often makes sense.

On the other hand, preserving your assets often takes precedence over growing them during your retirement years. Market volatility becomes less agreeable as you begin withdrawing from your savings. During volatile times, you must choose between accepting a lower income in some years or withdrawing a portion of your principal. If your principal is reduced early in retirement, it can have devastating consequences for your income in the long term. For this reason, many retirees choose to reduce risk as they near retirement through a more defensive portfolio allocation.

How to Switch Your Portfolio to Defense as You Enter Retirement

A defensive portfolio is designed to minimize risk while simultaneously generating the income and growth you need. This type of portfolio can vary widely based on your individual situation and goals.

The first step to creating a portfolio that will meet your needs in retirement is to understand your Required Rate of Return [RRoR™]. This is the amount your assets need to generate to fund your spending plan. With this figure, you can work with an experienced advisor to craft a defensive portfolio that generates the income you need while minimizing unnecessary risk.

There is no one-size-fits-all portfolio for any stage of life and retirement is no different. Your goals and personal situation are unique, and your ideal investment mix may be quite different from your peers. For those reasons, it is important to work with an experienced financial advisor to determine a strategy that is right for your unique situation.

Shift Your Portfolio to Defense with Financial Fingerprint™

The team of tax, legal, and investment professionals at Meld Financial have been helping our clients achieve their retirement dreams for more than 40 years. During that time, we developed Financial Fingerprint™ – a comprehensive wealth management plan that is quick to assemble, easy to understand, and simple to modify as your circumstances change.

With this nimble plan, and a partnership with an experienced advisor, you can understand your RRoR™ and develop a strategy to achieve your retirement dreams. To learn more, contact us.

Trending Articles

Weekly Economic Update presented by Meld University
Weekly Economic Update

School of Financial Wellness

Stocks slumped. The FOMC held interest rates steady and updated projections. Existing home sales and home builder confidence fell.

Wealth managers are key to your investment strategy.
5 Characteristics of a Quality Wealth Manager

School of Financial Wellness

Looking for a quality wealth manager? We pulled together our list of the 5 most important qualities to consider during your search.

A desk with a calculator, glasses, money and 3 blocks with IRA, 401k and ROTH written on them. These are meant to represent a guide to the many different kinds of retirement plans.
Retirement Accounts: A Comprehensive Guide

School of Saving and Investing

There are so many different types of retirement accounts, it can be difficult to keep track. This handy guide makes it easy.

Why Meld Financial?

Meld Financial, Inc. is an independent wealth management firm located in Birmingham, AL.

We specialize in financial planning, investment management, employee benefits and executive benefits for individuals, families, trusts, foundations and institutions.

We provide independent and objective services melded with customer-driven financial goals.

Mark McGarvey - Founder - Meld Financial

“We will always recommend the same course of action we would choose for ourselves, given the same circumstances.”

-Mark McGarvey, Founder