When you’re coming up on retirement within the next five years or so, it’s a good time to think about adjusting your allocations. The way you manage your investments now should change to reflect a more conservative investment approach.
It’s also important to note that right now, interest rates are in an inverted yield curve. That means that short term interest rates are higher than long term interest rates. It also means a recession may be on its way soon. Check out my video to learn more about the inverted yield curve:
Not quite ready to retire? Learn more about what to do during your accumulation phase.
Balance Your Portfolio
A balanced portfolio will look different depending on your life phase. When you’re mid-career, you want your portfolio to have a little higher emphasis on stocks, because you have time to make a better return on your investment.
But when retirement is just a few years away, you usually want to even out your stocks and bonds. Most people should aim for a 60/40 stocks and bonds split, or 50/50.
You do this so you can cut down on the risk in your portfolio. Bonds are important to lower your risk. When you are approaching retirement, you want your portfolio to be steady without the big market swings. They also help produce income which is needed to outpace inflation.
Start Building Up Your Cash Reserves
Start making sure that you have liquid money available to cover expenses. The five years before retirement is a good time to build up a portion of cash and short-term bonds. Aim for that to cover 3-5 years of expenses. It’s especially important now, because like I mentioned above, signs seem to be pointing toward a recession. So it might be wise to start building up a cash reserve.
This is also a good time to boost your savings account so that money is available. That money is essential in case we hit a recession and need to pull from the cash reserves first. When the market rebounds, you can replenish that cash reserve. We can’t time the market but we can always be prepared.
Rebalancing Your Portfolio
Before and during retirement, it’s still important to keep an eye on your portfolio. Check it each year and rebalance it when necessary, so that it’s performing to meet your needs and to handle the ebb and flow of the markets.
Here’s a simple rule of thumb: If your portfolio is tipped more than 5% in one direction, then you should reallocate it back. Your portfolio can easily tip that much in a year, so checking in annually can help you stay on top of it.
Over time, your allocation can become more aggressive than you need it to be because stocks will outperform bonds. So rebalancing your portfolio is an important way to maintain your target allocation.
Work with a Financial Advisor
The way you manage your portfolio just before retirement should be different than how you handled it the rest of your career. Your needs have changed, so your portfolio should follow suit. Working with a financial advisor can help you shift your allocations before retirement and beyond, so that you can manage this new phase of your financial life easier.
Do you need help preparing for retirement? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.