How to Invest Your Portfolio to Maximize Retirement Success - Root Financial

As retirees embark on their post-career life, one crucial decision often looms: how to allocate their investment portfolio. Many set their allocation at the start and never revisit it, a strategy that can jeopardize their financial security in the long run. Through the story of Eduardo and Anna, we’ll explore why continuous portfolio adjustments are essential and how a tailored approach can secure a comfortable retirement.

The Case of Eduardo and Anna

Eduardo, 65, and Anna, 64, planned to retire at the end of 2022. However, their heavy investment in tech stocks resulted in a significant 25% portfolio loss that year, delaying their retirement plans. Like many, they were unsure how long the downturn would last and feared further losses. Fortunately, 2023 saw a rebound, and by the end of the year, they sought professional guidance to safeguard their future.

Initial Financial Assessment

Eduardo and Anna had saved diligently: Eduardo’s 401(k) held $825,000, Anna’s rollover IRA was over $1 million, and their combined investment account was $616,000. With their home paid off and valued at $1.1 million, they were in a strong position financially. Their retirement vision was simple – spending time with their four children and nine grandchildren, with modest travel plans. Their monthly expenses were projected at $6,600, excluding healthcare and occasional large purchases like a new vehicle every five years.

Planning for Retirement Expenses and Income

A comprehensive look at their expected expenses and income was necessary. Their healthcare costs, including Medicare Part B and Part D premiums, and out-of-pocket expenses were factored in. Additionally, planning for new vehicles and projecting annual expenses, including inflation adjustments, provided a clear picture of their financial needs.

Eduardo planned to claim Social Security at 70, boosting his benefit from $2,850 at full retirement age to a higher amount due to delayed retirement credits. Anna had a pension of $600 monthly and planned to start her Social Security at 70 as well. This strategy aimed to maximize their secure income sources and reduce reliance on their investment portfolio during market fluctuations.

Crafting the Right Portfolio Strategy

The primary goal was to ensure Eduardo and Anna could weather market downturns without jeopardizing their lifestyle. Historical data suggests that the average bear market lasts about two and a half years, with some extending up to five years. With this in mind, we aimed to allocate a portion of their portfolio to stable assets that could cover five years of expenses.

Eduardo and Anna’s Portfolio Design

Eduardo and Anna’s total portfolio was approximately $2.45 million. The primary withdrawal account, their brokerage account, held $615,000. To determine the right asset allocation, we needed about $490,000 in conservative investments to cover five years of expenses. This was calculated by subtracting expected income from dividends and interest, conservatively estimated at $45,000 over five years, from their total needs.

Balancing Risk and Growth

The next step was determining how much of their primary account should be in conservative investments. We allocated 70% of their primary account to bonds and 30% to stocks, providing stability while still allowing for growth. This approach ensured they had sufficient funds to draw from during downturns, without needing to sell off assets at a loss.

From a broader perspective, while the entire portfolio might appear to need only 20% in bonds and 80% in stocks, strategic allocation within the primary withdrawal account allowed for a more aggressive investment of the remaining portfolio. This setup balanced the need for growth with the security of having stable assets during market volatility.

Adapting Over Time

Eduardo and Anna’s strategy wasn’t static. As they aged and Social Security benefits kicked in, their income sources diversified, reducing the reliance on their investment portfolio. For instance, at age 70, their combined portfolio might grow to around $3 million, assuming a 6% return rate. With Social Security and pension covering more expenses, they would need less from their investments, allowing for a potential shift to more growth-oriented assets.

Regular Reviews and Adjustments

Annual reviews and adjustments ensured the portfolio remained aligned with their financial plan. This dynamic approach considered market performance, income changes, and evolving financial needs. It provided peace of mind, knowing their portfolio could withstand market downturns and continue to support their retirement goals.

Eduardo and Anna’s story highlights the importance of a dynamic investment strategy in retirement. By regularly adjusting their portfolio to reflect changing financial landscapes and needs, they achieved a secure and fulfilling retirement. This tailored approach not only protected them against market downturns but also leveraged growth opportunities to keep pace with inflation.

For retirees like Eduardo and Anna, continuous portfolio management is crucial. It transforms retirement from a period of financial uncertainty into a phase of stability and enjoyment, allowing them to focus on what truly matters – time with loved ones and the freedom to pursue their passions.