Ask Susan!

Dear Susan: “As I approach retirement, is there a rule-of-thumb I should follow to adjust my portfolio?”

For those who prefer to watch and listen (click video) Susan explains how adjusting your portfolio allocations can help keep risk levels in check.

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Susan:
Hi, this is Susan Stiles, and today I’m taking a deep dive into the “Ask Susan” question for this month.

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As you approach retirement, it generally makes sense to review your current portfolio allocation and consider if a more conservative allocation makes sense to better protect your savings from market downturns.

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However, you need to keep in mind that you also need enough growth to outpace inflation and sustain withdrawals throughout retirement and possibly leave a legacy if that is your intent.

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You may have heard the common rule of thumb 100 minus your age rule. You simply subtract your age from 100, and the difference suggests that this should be the percent exposure you take in stocks. So 100 -65 equals 35. Therefore your stock exposure is 35% and your bond exposure is 65% because of increasing life expectancy. It is now more common to either use 110 or even 120 instead of 100 to subtract your age from.

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But this is a very simplistic, general approach to figuring out what your allocation should be as you enter your retirement years.

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Taking a step back and approaching this important decision by analyzing several important factors specific to you, may suggest different results and better outcomes.

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Factors to consider. Number one, your risk tolerance. If you’re comfortable with some volatility and understand and are experienced in investing in the stock market, you may want to have a higher stock exposure for more potential growth.

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Number two, retirement income needs, if you will, will rely heavily on your portfolio for income. You may be more comfortable and safer. Less volatile investments. Number three pension and Social Security. If these payments cover most of your expenses, you might consider a more aggressive approach, particularly if you want to leave money to your heirs. Number four amount of accumulated savings.

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If you’ve saved and invested well over the years and anticipate not spending all your money, then you may want a higher stock allocation to eventually pass the money and the investments to your heirs or charities.

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However, if you are not comfortable with the short term volatility that stock investing is characteristic of, you may want to keep your money in low volatility, more conservative investments because you don’t need the growth to keep up with inflation and your needs. And you know that you won’t be outliving your bucket of money.

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Additionally, you should consider what your life expectancy could be based on family history and your own medical history. To somewhat predict how long you will need to support yourself. And if you need growth in your portfolio to ensure you don’t run out of money.

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Number five market conditions and interest rates, bond yields and inflation impact. How conservative you should be. Until recently, interest rates have been low, forcing retirees to take on a more aggressive allocation to try and capture more earnings to keep up with inflation and their income needs. With interest rates being higher in the last couple of years, a more conservative portfolio may very well generate the earnings needed, thereby being able to decrease your stock exposure and potential short term volatility.

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If you’re confident you want to live your money and want to prioritize leaving a legacy, you can afford to maintain a more growth oriented portfolio. Here’s how you might structure it. First, adjust asset allocation for growth and legacy. Instead of shifting too heavily into bonds. Consider keeping a higher allocation in stocks to maximize long term growth.

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50 to 70% in stocks for growth, 30 to 50% in bonds, real estate or income generating assets for stability and liquidity.

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Number two, use a bucket strategy short term 0 to 5 years cash, bonds or stable assets for near term expenses mid term 5 to 15 years. A balanced mix of stocks and bonds. Long term 15 plus years growth focused investments for legacy. Number three consider tax efficient giving. Roth IRAs are tax free inheritance to your heirs. Trust can control how assets are distributed and avoids probate and saves time.

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Charitable donor advised funds dafs or direct donations for tax benefits. Life insurance tax free proceeds to your beneficiaries.

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If you have a taxable estate, it may be prudent and of interest to you to engage in strategic estate planning strategies, allowing you to potentially reduce your estate taxes. This is also a good time to engage in some gifting strategies during your lifetime.

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To also help lower your future tax liabilities.

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gifting now you may want to start a gifting plan so that you can enjoy the pleasure of gifting to charities or heirs while you are still alive. And you can witness the benefits of your gifts.

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The annual gift tax exclusion. And it’s $19,000 per recipient in 2025.

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If, however, you enjoy investing in stocks and have the financial and mental flexibility to handle market fluctuations, there’s no reason to stop in retirement. In fact, maintaining a meaningful stock allocation can

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support long term growth. Stocks really do help combat inflation and ensure your portfolio continues growing, especially if you’re focused on leaving a legacy.

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Provides dividend income investing in dividend paying stocks can generate passive income while keeping your portfolio invested for growth. Take advantage of market opportunities if you enjoy managing your investments, you can stay active in stocks selection and asset allocation.

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So in conclusion, don’t do it alone. It may be prudent to align with professional advisors who can support you as you age and provide continuity and guidance to your family and heirs. Once you pass, they can provide you with experience and strategies that you may not even consider.

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Additionally, it is well documented that as we age, many of us may experience cognitive decline. This could result in very costly losses that, once it is uncovered, it could be too late to recover from them. This can be in the form of many forms of elder fraud, investment mistakes and missing track of accounts. An advisor will help consolidate your accounts to simplify management and tracking, and make annual tax preparation more efficient as well.

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So thank you for joining me today on our Ask Susan column, and look forward to next month’s.

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Announcer:
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– Susan