How can you make sure your money keeps working for you in retirement? Here are some strategies for investment in the latter years of your life.
I’ve written before about how much one can take as a percentage of a retirement portfolio safely and how that can be modified. But, how can physicians invest the funds themselves?
First, I’d emphasize that as you stop working, your money needs to keep working. The average retiree in their 60s probably has a combined (with spouse) life expectancy of three decades or more. More than likely, your retirement portfolio has to keep up with taxes and inflation at the least and some real growth would be nice. This means at least a 5 percent-plus return annualized.
So, for most people, an equity-based portfolio is the only good choice. However, the difference between retirement and the accumulation years is the risk of needing to sell retirement assets when prices are significantly down. During the accumulation years when the investment prices might fluctuate down, you would lose nothing since you were not selling. In fact, market price drops allowed buying “cheap”. But in retirement, you are actively drawing out funds and might be forced to sell at a loss.
Having a down market in the first few years of retirement carries the highest risk of doing poorly long term. This is due to selling reduced price assets early, something that can’t be recovered as your base of assets is permanently reduced.
One approach to this risk is to tilt the portfolio more towards fixed income early in retirement, offering stability but lower returns. Recent studies have shown that moving to a higher stock percentage in a portfolio later in retirement ends up with longer lasting portfolios. If stock prices drop, more of the annual expenses are drawn from the fixed income side.
Another approach is the bucket method. An allocation is made for the long term, but two-to-three years of annual withdrawals are deliberately placed into short-term high-quality fixed income. If the market suffers a significant drop in prices, this bucket of money is used to allow time for the other holdings to recover some before any sales are necessary.
Either of these approaches seems reasonable or they can be combined. One caveat is that many of these methods have worked well in our 30-year bull market for fixed income. If we are heading for a bond bear market due to rising interest rates, the fixed income allocation will need to be very carefully chosen. It’s not easy, so get some help if you don’t have the time and expertise to both make and then monitor your allocation carefully.