If you’re like most investors, you want to achieve growth while you’re working and income after you retire. But that doesn’t necessarily make it smart to change your investment strategy when you retire by shifting your portfolio completely out of stocks into less volatile, “income” investments like bonds and cash equivalents.
The Tax Bite
As a rule, stocks are riskier and more volatile than other types of investments. Therefore, investors might decide, as some retirees do, to sell your stocks and reinvest in less risky securities in order to protect the gains they have achieved. But, unless the stocks sold are in an individual retirement account or other tax-deferred retirement account, that move won’t preserve all the accumulated gains. When stock is sold, investors lose part of those gains to capital gains tax.
The Inflation Bug
Investors may also create another, potentially more serious, risk. Without stocks in a portfolio, you increase the risk that future inflation will erode the real value of the investments and reduce spending power.
Let’s look at some numbers. Normal retirement age is gradually increasing. For someone born between 1943 and 1954, it’s 66. If you retired today at age 66, your additional life expectancy would be 20.2 years according to IRS tables. Over the past 20 years, (1994-2016) the Consumer Price Index (commonly used to measure inflation) has, on average, risen about 2.3% a year according to the Bureau of Labor Statistics. If inflation continues at the same average rate for the next 20 years, you’d need nearly $79,000 of income in 2036 to match the buying power of $50,000 today.
The best way to fight inflation is to have the potential to earn investment returns that will help keep investors ahead of the erosion in their purchasing power of inflation. The problem is there’s no guarantee about the future returns of any variable investment.
A Better Way?
Instead of moving your entire portfolio out of stocks when you retire, investors might consider other strategies. Investors could maintain your current portfolio mix then, gradually, sell some of the stocks each year.
This strategy would slowly reduce exposure to the risk of owning stocks and also generate income to supplement any cash dividends and interest income received. Investors would spread out your capital gains taxes and be able to keep a large part of their portfolio invested in stocks for a considerable number of years.
Another strategy would be to simply reduce the portion of their portfolio that is invested in stocks as retirement approaches. For example, if 75% of a portfolio is in stocks before retirement, investors might lower that percentage to 30% or another percentage that they would be comfortable with. That way, investors still retain some opportunity to gain from any future stock market advances, but they would also reduce your portfolio’s overall risk and volatility.
If you need help with your investment strategy, we are here when you are ready. Reach out to us at Krietzberg Wealth Management at 732-383-2060 for a complimentary analysis of your current investment strategy.
This information is intended for general use with the public and should not be construed as investment advice.
*The content of this material was provided to you by Lincoln Financial Advisors for its representatives and their clients. This article may be picked up by other publications under planner’s bylines.
Curtis Krietzberg, David Krietzberg, and Felicia Garland are registered representatives of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. It is not our position to offer legal or tax advice. Krietzberg Wealth Management is not an affiliate of Lincoln Financial Advisors.