How to Invest Leading Up To—and In—Retirement 


The retirement equation isn’t looking good for baby boomers right now.

“Boomers have weathered many challenges in a short period of time: the financial crisis, high unemployment, rising medical costs and supporting aging parents and adult children,” says Pat O’Connell, executive vice president of the Ameriprise Advisor Group. “These events have squeezed their finances and made it difficult to save.”

Only 42% of workers older than 55 have saved more than $100,000 for retirement, according to Employee Benefit Research Institute’s 2013 Retirement Confidence Survey. We are also living longer--with the average life expectancy into the early 80s, which means larger nest eggs to continue to make ends meet.

“People have to fund longer retirements with less fixed income sources like pensions, high healthcare costs and a stock market that isn’t performing like it once did—it’s a perfect storm of sorts,” says Scott Halliwell, certified financial planner at USAA.

While fixed income yields are low compared to historical standards, people are taking on more risk in their portfolios to help increase their savings. “That’s an OK thing to do if you understand the risk you’re taking but oftentimes, people don’t,” says Halliwell. As a general rule of thumb, investments with greater return potential also have greater loss potential.

The recent strength on Wall Street has many people buying equities to make up for lost time, says Dan Keady, director of financial planning at TIAA-CREF, but it’s important to have a plan and to know your goals and timeframes first.

Here are expert tips to help moderate portfolio risk while still receiving solid returns.

Have a Long-Term Perspective

Since you’ll lose purchasing power if your investments earn 1% or 2% per year, Mackey McNeill, CEO of Mackey Advisors, suggests knowing the fundaments of stock indexes and how they perform over different time periods. A stock with many ups and downs within a year could trend up in the long-term, so be sure to take a longer approach. “There aren’t that many 10-year negative return periods,” says McNeill.

Once in retirement, Robert Stammers, director of Investor Education for the CFA Institute, recommends going into capital preservation mode and reducing your stakes in stocks to avoid losing money in wild market swings. “You have to be careful to not lose capital because you have to live on it.”

Despite the bullish market, O’Connell says we’re in the most difficult environment to generate income. CDs and bonds with record-low rates mean that retirees have to take more risk to generate income by choosing investments like preferred stocks, dividend paying stocks and REITS.

“Always run the numbers in the financial plan to help you make a decision,” says McNeill. Modeling based on an all-stock portfolio has the risk of short-term volatility and long-term purchasing power, or inflation, rather than what’s happening in the market today.

Be Diverse to Counteract Volatility

You don’t have to guess where the markets are going if you have a diversified portfolio, says Keady. “If somebody’s going to jump in and out [of the market], they probably shouldn’t invest.” The money that you invest should be in for the long-term to weather the volatility.

“Think about the seasons—winter is a recession and summer is an expansion,” says McNeill. Putting your portfolio in a variety of asset classes like stocks, real estate or commodities can help smooth out the volatility. Commodities can be more volatile than the S&P but if you put both in your portfolio, you have less volatility overall, she says.

“Different assets classes don’t work the same and you can use that difference to your advantage and have less risk and volatility by mixing asset classes,” says McNeill.

As you look to diversify, McNeill suggests thinking about investing a portion of your portfolio in commodities, real estate, emerging markets and small caps through an ETF. Every quarter, rebalance your portfolio to your set allocation amounts,” she suggest. “If you’re going to own 5% emerging markets and they go up to 7%, you have to sell that 2%.”

Be Judicious About Risk

“Focus on the long-term period of your retirement by diversifying your investments to produce income that keeps your risk profile inside your comfort zone,” says O’Connell. Figure out whether you need to take on more risk and don’t focus only on principal volatility but also consider interest rate risk, inflation risk and longevity risk.

If income is your primary goal, consider a portfolio having short-term principal fluctuations. You won’t increase your overall risk tolerance if you focus on the long term and diversify investments to produce income.

Delay Social Security

Instead of taking on more risk in your portfolio, delaying Social Security may be a better option, says Keady. Having a source of lifetime income will also help to mitigate some inflation risk overtime. Consider taking more out of your portfolio or working part-time so you can delay taking Social Security until age 70.

Pay Off Debts

“If you don’t have a mortgage, it reduces the strain on our portfolio,” says McNeill. Not having any debt increases the amount of money you have for discretionary spending. If necessary, consider part-time work to pay off your mortgage sooner. “If you don’t have enough money, think about dialing your life down,” she adds.