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Helping Your Portfolio Age Gracefully

Whether it's eating more sensibly, going to bed earlier or exercising a little less strenuously, everyone has to make concessions for age. A little good judgement can help the mind and body continue to function properly for much longer.

Similarly, good judgement can also help your investment portfolio age gracefully. Here are six tips to help you transition your investment program into and through retirement.

1. Have a plan for downshifting your asset mix

Fundamentally, there are two reasons that investment programs should get more conservative as a person enters retirement. One is that when a portfolio goes from having money contributed to it to having money withdrawn from it, there is less cushion for volatility because withdrawals tend to amplify the natural ups and downs of the market. The second reason is that the older you get, the less need there is to invest for long-term growth. So, you need a plan for easing back the risk in your portfolio over time, but as the next two points suggest, you shouldn't go overboard with this.

2. Don't view retirement as an end point

Starting to draw money out of a portfolio does mark a significant change in risk characteristics, but other than that, you should be looking at your portfolio as a program to last the rest of your life, which may be 20, 30 or even 40 years beyond retirement. Don't make the mistake of getting too conservative with your investments as you approach retirement, because it is just one milepost on a long road still ahead.

3. Leave room to adjust to market conditions

Don't be bound by a formulaic approach to asset allocation, in which you base your asset mix strictly on your time horizon. For old and young investors alike, time horizon and risk preferences should guide your asset mix, but so should market conditions, including stock valuations to interest rate levels.

4. Have a sustainable withdrawal strategy

As you move into your retirement years, make sure you are not depleting your savings too quickly. Experts used to widely recommend withdrawing no more than 4 to 5 percent a year if you wanted a portfolio to last while still having room to grow for inflation. However, today's low interest rate environment (more on this below) has caused a re-thinking of even those modest withdrawal targets. There isn't a magic number for how much is safe to withdraw, but the important thing is to monitor and adjust your withdrawals from year to year, so you don't draw down your portfolio too drastically.

5. Recognize the new income reality

Over the past 30 years, short-term CD rates averaged 4.66 percent. Thirty-year Treasury yields averaged 6.81 percent. Now, those numbers are 0.18 percent and 3.17 percent, respectively. Even if it means taking a little more risk in stocks, today's portfolios are forced to rely less on income-bearing investments.

6. Don't fill up on junk

Lower-grade bonds are one potential source of income, but they also introduce more risk into your portfolio. Junk bonds should be viewed as having a risk profile more similar to stocks than Treasury bonds.

Just like aging, investing in retirement poses some challenges. But recognizing those challenges and meeting them thoughtfully can help you get the better of them.

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