In the previous blog, we discussed the “Rule of 100” to calculate the acceptable level of risk at any given age when investing to accumulate income for your retirement. Risk versus return is one of the key tradeoffs with regard to your retirement income. If you have an excessive amount of market risk in your investment portfolio, you could find yourself suffering a loss that you won’t have time to recover from before the time you plan to retire. This brings us to the second in our list of common retirement mistakes, subjecting your nest egg to significant market drops.
It’s perfectly acceptable to carry a certain amount of risk in your portfolio. After all, higher-risk investments typically have the potential to generate larger returns than do low-risk investments. But, don’t put your entire nest egg in one basket. When examining your income strategy, ask yourself, “Do I need the market to do well to reach my target income during retirement?” If the answer is yes, you probably need to reconsider your approach. If we experience a market downturn, you may have to put off retirement indefinitely.
You might be thinking, “But over the past few years, my stocks have been performing, nay, outperforming all expectations, and I’m on target to retire comfortably”. And that may be the case, but beware the bear – the bear market, that is. Secular market trends are long-term trends lasting anywhere from five to twenty-five years. These trends can be characterized in two main ways, the bull market and the bear market. A bull market is a period of long-term growth which results in relatively quicker and more substantial gains for investors. A bear market is a long period of stocks declining or remaining flat. This results in stagnation or a significant loss of capital for investors.
In the past 120 years, there have been five bull markets and four bear markets. From 2009 until the present, we’ve been experiencing one of the strongest stock market rallies of all time, resulting in record highs for the indexes. But the party won’t last forever. Investment strategies that work reliably in bull markets typically are not effective in a bear market. So, it would be wise to start purging some of this risk from your portfolio in favor of more predictable methods of capital growth and income.
As you begin to shift from higher-risk to more stable sources of income, you should consider products like certain annuities or life insurance policies that can fulfill your specific needs. To be clear, not all annuities or life insurance policies are created equal and some may not even provide the benefit you’re looking for. So, it’s important for you to consult a financial advisor who has a thorough knowledge of retirement strategies and can pair you with the best solution.