What is the importance of a diversified portfolio in retirement?
It’s difficult enough to plan and save right for retirement, given today’s topsy-turvy financial markets. What’s more, it can be a bit of a puzzle in those Golden Years to come up with the right withdrawal plan.
What is the importance of a diversified portfolio?
The idea, of course, is to find that balance between spending down the portfolio while maintaining the right asset allocation to capture future growth possibilities, which is the key to maintaining a diversified portfolio. One method that investors use for spending during retirement is the ‘bucket strategy.’ Think of it as using Three Buckets, each one takes into account the risk level of the portfolio’s assets over a given time period.
According to an overview in the American Association of Individual Investors (AAII), more than thirty-percent of financial professionals recommend this approach to their clients:
One approach to developing a retirement income plan is the bucket strategy…(that) segments retirement assets by certain categories…based on the risk level of the assets, the needs or expenses these assets are expected to cover over the period of time in retirement when the assets are expected to generate income. Generally, and with the help from a financial advisor, the bucket approach can help bring that all-important sense of control to the investor’s concerns about having enough income during their lifetime.
A financial advisor can also help an investor assess their individual risk tolerance in handling the financial strains put on the portfolio during the market’s dips. One method the financial professional uses is a questionnaire that will help determine the best allocation given one’s time horizon, other sources of income, like pensions and social security.
Ultimately, the investor may consider anchoring their investment portfolio using a certain percentage of their assets to purchase an annuity; this, to provide a fixed stream of income during their retirement years.