Investing Near and During Retirement
Investors in or near retirement should invest differently than they did in their 30s or 40s.
That's because retirement creates different portfolio needs.
In the accumulation phase (pre-retirement), building up your portfolio's value is what matters.
In retirement (or in preparation for retirement), there are 3 keys to investing success:
Income from your portfolio, the higher the better
Growth in your portfolio's income at least exceeding inflation
(including any potential dividend reductions; an income stream is the other side of growth)
Low price volatility from your holdings
Most retirees intuitively understand the need for income in a portfolio. But it's how all 3 of these factors interact that make retirement investing successful and sustainable.
There are 2 ways to get money out of your portfolio:
Through getting paid dividends / interest / distributions
Through liquidating a portion of your holdings
Add to this 1 simple fact... Stock market prices fluctuation. Sometimes, they 'fluctuate' down, and by a lot (see 2009 as an example).
If you rely on dividends, price fluctuations don't matter as much. Who cares if Kimberly-Clark's (KMB) share price was down in 2009 if the dividends kept rolling in (which they did, with increases every year during the Great Recession)?
Now if you were relying on liquidating holdings in your portfolio, you'd care a great deal about Kimberly-Clark's stock price declining - because you'd be 'forced' to sell shares when they are down; you'd have to sell more shares (and use up your savings quicker) because each share is worth less.
The more you rely on portfolio income in retirement, and the less you rely on liquidating holdings, the better.
Portfolio income is a great way to take part in the market’s growth potential, but not be forced to sell when markets decline.
On top of seeking out higher yields in retirement, the growth potential and income strategy of your portfolio is extremely important.
What good is a portfolio yielding 12% if your yield on cost shrinks to 6% in 2 years? What matters is that as a whole, your portfolio seeks to generate rising income over time. This means your holdings that increase their dividends have to offset any (and hopefully none) stocks that reduce their dividends. Both growth potential and managing an income stream matter a great deal.
Finally, volatility matters in the event you do have to liquidate some of your holdings. It's better to be prepared for this event with lower volatility investments that don't have quite as bouncy of stock prices.
When you think of your investments at the portfolio level instead of at the individual security level it becomes easier to imagine a portfolio that has a nice combination of yield potential, growth opportunity and effective income strategy.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Historical performance is no guarantee of future results.
All company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.