You've worked hard, played by the rules, and now you're in your 50s with a nice nest egg put away. How do you manage the transition to retirement, in terms of readjusting your portfolio from growth toward income?
Perhaps the most important advice is that once you've made a plan that you believe thoroughly addresses your retirement needs, stick to it. That can be surprisingly difficult, depending on what happens in equity markets.
A lot of Baby Boomers invested heavily in stocks from 2004-07 and delayed making the transition to lower-risk investments because they believed the market would continue to climb. They got caught in the terrible downturn of 2008-09. Now they have a lot less for retirement than they thought they would.
It's important to have a specific date in mind for when you are going to retire. This should be based on multiple factors, not just your stock portfolio. For example, when are you eligible for full Social Security benefits? That varies depending on when you were born; those born in 1960 or later will have to wait until age 67. Are you slated to get a defined-benefit pension from your job? Are you fully vested already?
Then make an honest assessment of what your spending needs are going to be. Are you going to be selling the house and moving to a retirement area? What are the tax consequences of this? If you enjoy your job, would you prefer to keep working (and saving) a little longer? It's tough to get back into the working world once you've left it behind.
After you have a target in mind, you can start formulating your retirement strategy for getting there.
Increase Automatic Investments
Most people in their 50s are earning the biggest incomes of their careers. Instead of rushing to buy a sports car, you should consider increasing your automatic investments in your retirement plans, especially if your employer offers matching contributions to a 401(k) plan.
Adjusting your portfolio as you near retirement isn't that different from the re-balancing you've probably been doing all along, as certain asset classes perform better than others, resulting in an allocation that is different from what you set out to have.
When you're about 10 years from your target retirement date, gradually reduce the stock portion of your portfolio to about 50%. You can do some of this as part of your usual adjustments. If a stock that you've been holding has been a disappointment and you've decided to sell, shift that money towards bonds or other lower-risk investments.
If your retirement picture is unusually bright -- you're one of the lucky few who is sure to get a generous pension, or your nest egg has grown even faster than you'd hoped -- you may want to go higher than 50%. Just remember what happened to those investors in 2008!
Seek out companies that have consistently raised their dividends over time, or mutual funds that invest in such companies.
Try to keep about 25% of your portfolio in U.S. bonds or bond funds, with another 5% in international bond funds.
Whip Inflation Now
Retirees often dread the specter of inflation, with good reason. Many Americans who worked through the stable-price economy of the 1950s and 1960s were totally unprepared for the inflation of the 1970s. That's an important fact to remember as you project your spending needs in retirement - and remember, people are living longer than ever, too.
Treasury Inflation-Protected Securities (TIPS) help offset increases in the price of goods. But in the low interest rate environment of recent years, yields on TIPS have fallen to low levels. That means that if you buy them now, a rise in rates could lead to temporary losses.
You can build up your position gradually through the Vanguard Inflation-Protected Securities Fund Investor Shares. This fund is designed to protect investors from the eroding effect of inflation by investing in securities that seek to provide a "real" return.
The fund invests in bonds that are backed by the U.S. government and whose principal is adjusted quarterly based on inflation. In addition to typical movement in bond prices, income can fluctuate somewhat more in a fund like this because payments depend on inflation changes. Investors with a long-term time horizon should consider this fund as a complement to an already diversified fixed income portfolio.
Traditionally, investors nearing or at retirement would keep a small portion of their assets in cash. But with interest rates so low, you need a microscope to measure the returns.
A possible alternative is the short-term bond index funds offered by Fidelity and Vanguard. It's a bit less stable than cash, but the increase in return outweighs the increase in risk.
When you find yourself just five years away from your retirement target date, it's time for another thorough evaluation of where you are and where you're going. Reduce your stock allocation to 40%, holding onto only the most rock-solid equities. Use the money to beef up bond and cash equivalents.
If you find you're falling short of your goals, don't panic. It's not a great idea to expand the risky side of your portfolio to deal with the shortfall. Better to cut daily spending and increase your contributions to 401(k)s, IRAs, etc.
You've reached the age where protecting what you've earned becomes more important than continuing to pursue growth. Everyone deserves a happy, peaceful retirement, and a few sensible strategies can help you get there.
For more retirement advice, consider consulting the financial advisors at Charles Schwab, TD Ameritrade, or T. Rowe Price.
Ultimate Retirement Guide: Are you making the right investment moves for your retirement, or are you blowing it by making all-too-common money mistakes? There are crucial steps that you should be taking now, to build wealth over the long haul. To find out whether you'll have enough money in your later years, download our free report: Your Ultimate Retirement Guide.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.