One of the common investing questions is how (or if) you should change your investments over time, especially as you get closer to retirement. Most people know the way they invest in their 50’s and 60’s should probably be different than the way they invested in their 30’s, but aren’t sure what this looks like in practice. In this episode, we tackle this question and share our thoughts. We cover the principle of matching your investments with your time horizon, discuss sequence of returns risk and how to protect against it, and share a framework for how to think about the right investment mix for you, particularly as you get closer to retirement and needing to withdraw from your investments to fund your lifestyle.
Outline of this episode
- This episode’s topic has nothing to do with market timing [0:23]
- How to think about your investments relative to the time period [1:29]
- Yes, most people should change their approach as they grow older [6:48]
- Strategies for protecting against having to withdraw from stock investments in a down market [8:52]
- A buffer to protect against sequence of returns risk [11:15]
- The importance of projections for your retirement portfolio [12:34]
- Recap of this episode [13:54]
Instead of focusing on retirement, consider the time horizon
What do we mean by “time horizon” when talking about an investment approach? It is the amount of time between where you are in life and when you are going to need the funds the investments represent. This time horizon is important to determine because you’ll invest differently based on the time horizon. Once you know the time horizon, you can back into your investment strategy to select the investment allocation that will help accomplish your goals within that time horizon.
Will your investments last for your entire retirement?
This is a vital question to consider when making adjustments to your retirement accounts and investments. Your goal should be to amass enough through your investments that your retirement living expense withdrawals will be a "safe" portion of your entire amount. As you can see, if your living expenses are expected to use a significant amount of your retirement funds each month, you could quickly deplete the money you’ve saved for retirement and find yourself in a tough position.
Should a person nearing retirement adjust their investment strategy?
The short answer (for most people) is, “probably.” It will depend on what your initial investment strategy was, but in most cases, investors tend to be more aggressive when they are younger and should become more conservative as they near retirement. The reason is that you don’t want to experience "sequence of returns risk" if your investment allocation is too aggressive and you have unfortunate timing with stock market returns. Generally speaking, as you near retirement most people will want to decrease the amount of their investments that are in stocks and increase the amount that are in cash or bonds. How much will depend on the size of your portfolio, what you anticipate your living expenses to be during retirement, and more. In the end, you want to avoid putting yourself in a situation where a temporary decline in the markets will impact your living situation during retirement.
Resources & People Mentioned
- Podcast Episode #5: The 80:20 Rule of Investing
- Download our guide: The Toolkit for Optimizing Your Finances as an Employed Physician
- Download our guide: The Financial Checkup