Lower your investment risk after retirement

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Focus on Finance by Steve Wright

When you look at your investment portfolio, what do you see?

If you are like many investors you see a diversification of your assets which has about 50 percent in solid, safe and low yield investments such as CDs or money market funds, and the other 50 percent in medium to high risk growth investments, such as stocks, real estate or futures.

When you are in your 30s, 40s and 50s, this sort of break down of your money often can be exactly what you need to help secure your financial future. During that 30-year span, your earning power is usually at its highest and a steady and secure source of income can keep losses in the market or elsewhere from having any truly devastating effect on your overall financial picture.

As we age, however, this financial picture can begin to change. Once we retire, our financial landscape may turn from one of building wealth for the future to preserving wealth for the present and future.

Traditionally, the amount of money earned on a yearly basis after retirement is significantly less than it was during a person’s working life. In many cases, the ability to produce income by working is altered considerably and, as aging continues, may stop altogether. A severe loss from a medium or high risk investment which would have had minimal financial impact 10 years ago may have a significantly higher impact on your over all financial picture after retirement.

With the vast majority of Americans both living and remaining healthier longer than ever before, the amount – and investment distribution – of wealth required to maintain a comfortable lifestyle after retirement has, in many cases, changed as well. To help ensure a secure financial future, it is important to take steps to avoid a situation where the problem you face isn’t dying too young, but rather living too long. One way to consider doing this is reducing the number of investments you have in your portfolio that fit into the medium and high risk categories. If you’re going to invest the money you’ve saved by years of sacrifice, you need to put it at a much lower risk. No, it won’t be doubling this year, but you won’t be losing half of it, either.

Less risky investment strategies you should consider are:

Real Estate: Once you retire, however, sell all other properties (except where you live) and invest in Real Estate Investment Trusts to make your real estate investment more liquid and establish an income stream.

Stocks: Because of risk, it’s far better and less time consuming to buy what is called an Exchange Traded Fund than it is to buy individual stocks. You can get ETFs that track the Dow Jones, NASDAQ, S&P 500, Russell Index, etc. If you invest in the first three, you’re investing in almost every big business. If you want more small businesses, the Russell can add that. All four would spread your stock holding across almost the whole market, thereby potentially minimizing your overall risk.

Bonds: This is a less risky way to invest in business. There are many different types of bond funds and bond investment strategies that do a great deal to remove the complexity and sometimes high cost of individual bond investing, while spreading your bond investment across many businesses. If you want to investigate the more complex methods, make sure you use a good professional financial adviser.

As one asset class outperforms the other, your portfolio’s actual asset allocation will vary from your target allocation. Therefore, it’s necessary to rebalance the asset classes in your portfolio. This should be done on a regular basis, usually when actual allocation deviates from the target allocation by some predetermined percentage. You don’t need to become a financial expert to make money in your investments – you just need to be careful.

These key strategies can reduce your investment risk and increase your return. Unless you want to spend your free time doing this, you’ll need a specialist to design and implement these strategies for you. Then, simplify your life and focus on what you really love —and see how good it feels.

While diversification is recommended, diversification does not assure a profit or guarantee against loss as all investments have risk: real estate is subject to market risks, default risks, and credit risks, which may cause a significant decline in property values. Exchange-traded funds are subject to risks similar to stocks and mutual funds, including the potential for loss in principal value. Bonds are subject to interest rate risks which may decrease the bond value if interest rates rise.

Steve Wright is the managing member of The Wright Legacy Group LLC.

What is Focus on Finance?

Have a question about your finances? Submit it to our panel of local experts who answer your questions on The News-Enterprise Money page every Sunday.

A panel of local experts with experience and knowledge of this community respond to questions about 401(k)s, 403(b)s, annuities, certificates of deposit, home mortgages and/or refinancing, investing in the stock market, financing retirement, reducing income taxes and related topics. Email your questions to: focusonfinance@thenewsenterprise.com or mail to: Melanie Parker, The Wright Legacy Group, LLC, 1104 Julianna Court, Elizabethtown, KY 42701.