So you have gotten all the way to retirement and now have a pile of cash from an IRA, pension lump-sum payout, or your individual investment account. You are now looking for investments to carry you through your golden years and maybe leave a little for an inheritance for your children and grandchildren.
First of all, you will need money for your living expenses. Many individuals have used bank CDs and high yielding investments like utilities and bank stocks to provide this spending cash. Unfortunately, with the Federal Reserve holding interest rates near zero for the indefinite future, this is not an option. One can simply not raise enough cash to live on while making less than 1% on a bank CD. Even if one had the many millions of dollars it would take to cover expenses at these interest rates, that would be a terrible waste of capital.
Secondly, since life expectancies are rising and the chances of you outliving your money are growing, it is necessary to have an element in your portfolio which will provide growth. Inflation can also be an issue, as we have been seeing in recent years. All the more reason to include growth vehicles among your assets.
A retirement portfolio should therefore be made up of three different types of assets.
The first type should be cash assets. These are things like bank CDs, money market funds, and good-old savings accounts. While these pay little or no interest, especially when inflation is taken into account, a certain cash balance must be maintained to ensure money for living expenses is available no matter what the markets do. A good rule-of-thumb is to have about 5 years’ worth of expenses available in cash at all times.
The second group of assets that should be included are interest paying assets. This includes things like bonds, high yield stocks, Limited Partnerships, preferred stocks, rental properties, and REIT funds. Among industries that tend to produce high yielding stocks are utilities, banks, diversified companies, and large multinationals (think Coca-Cola, McDonald’s, Microsoft, and Wal-Mart).
These assets will grow in value at about the rate of inflation while providing a steady stream of revenue when the markets are flat. They also have some downside protection since the interest rate or dividend they pay will tend to increase as their price declines. Finally, the interest and dividends they pay will help to replenish your cash assets as you spend money on expenses.
Ideally your income from these sources will match your expenses. This was once easier to do than it has been recently. Interest paying assets should make up about 50% of your portfolio. If you have a very large portfolio (more than $10 million) they can make up a lessor percentage since you’ll be able to withstand the fluctuations of the market without ever being in danger of not being able to raise needed cash.
The remainder of the portfolio should include growth stocks. This should include a wide range fo stocks, including small caps, large caps, and international stocks. This segment of your portfolio will provide the growth needed to combat inflation.
With a properly allocated portfolio, you can live a worry free retirement.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.