I am a 65 year old preparing for retirement within the next three to five years. I am looking for different types of pension funds. Would adding stocks with a dividend structure along with gold and cryptocurrencies be a good mix?
If you’re moving from building wealth for retirement to distributing wealth during retirement, you’ll need to consider preferences regarding your life and money. Those factors can include your risk capacity, risk tolerance, lifestyle preferences, longevity, needs, diversification and tax location. Retirement planning is done in phases, with a pre-retirement phase over three to five years where you begin to adjust your mindset, lifestyle and investments for your next phase.
(If you have additional questions about investing or retirement, this tool can help match you with potential advisors.)
How to structure your portfolio
The structure of your retirement portfolio should reflect your needs, lifestyle, risk tolerance and capacity, and financial resources. Diversification across tax location, investment type, time horizon and goals will help optimize your retirement portfolio.
Start by assessing your ‘sleep well night meter’. Your risk tolerance may or may not match the risk you need to maintain purchasing power and growth. Maximizing for factors such as growth can help you meet your longevity and medical cost needs.
Second, select fundamental investments that meet your fundamental lifestyle needs, commonly referred to as your core portfolio. For example, three to four low-cost, diversified index or exchange-traded funds (ETFs) might fit your core portfolio of stocks, bonds, and domestic and international investments.
Your participation in market shares depends on how much guaranteed income coverage you have from resources such as Social Security and your risk tolerance.
If you have the capacity and resources to accept volatility and risk for potential additional growth opportunities, consider adding speculative assets to your portfolio, such as gold and cryptocurrencies, and take advantage of bear market corrections.
Let’s take a closer look at each of these categories of lifestyle and risk considerations. (If you have additional questions about investing or retirement, this tool can help match you with potential advisors.)
While the average life expectancy of Americans has taken a dent in recent years, they still enjoy long retirements by historical standards. According to the Centers for Disease Control and Prevention, the average life expectancy is about 80 years for women and 74 years for men. These are averages, which means that retirement can take 25 to 35 years. Longer time spent in retirement requires more funding, and more funding requires a balance between retention and growth.
If your investment choices are too conservative, they may not provide the growth needed to meet your longevity potential. Consequently, if selections are too aggressive, there is a risk of poor long-term performance that contributes to longevity shortfalls. (If you have additional questions about investing or retirement, this tool can help match you with potential advisors.)
Lifestyle needs and preferences
Your needs and lifestyle preferences are essential when considering investment choices. If your lifestyle preferences call for higher levels of funding, your investment selection may be more growth-oriented.
Perhaps you have travel aspirations, you are philanthropic, you have wealth transfer goals, and you have higher everyday lifestyle standards, all of which require a propensity for growth. Rather, more reserved lifestyle preferences will shift your investment choices towards a more balanced, conservative growth approach.
Basic care and needs must be met during retirement. Medical costs during retirement and support and long-term care services towards the end of life are expensive. These services require a combination of public or private insurance protection with private funding supplements.
Medicare supports a huge amount of medical care starting at age 65, but leaves gaps in coverage that require money. If long-term care insurance is purchased by age 65, the premiums are expensive, meaning they are self-funding. Current and long-term care coverage, needs and resources will influence portfolio composition. (If you have additional questions about investing or retirement, this tool can help match you with potential advisors.)
If you are ready to be matched with local advisors who can help you achieve your financial goals, start now.
Risk capacity and tolerance
Risk capacity is your ability to take investment risks, and risk tolerance is your willingness to take that risk. Both forms of risk assessment affect your retirement planning and the structure of your retirement portfolio. When considering risk capacity, you should consider your other available financial resources, which will affect your risk tolerance.
Other financial resources, such as Social Security and a pension
, private annuity or real estate income streams, will determine how much risk you can accept in your market portfolio. For example, Social Security, pensions, and private annuities are guaranteed income streams that fund a certain percentage of essential lifestyle needs over time.
The presence of fixed resources reduces the need for pension financing with additional market resources. It increases the risk capacity you can accept to drive portfolio growth and thus combat inflation and longevity risk. In addition, you may not need to replicate income types in the marketplace if abundant resources reflect income.
Risk tolerance also includes your emotional ability to sleep well at night during periods of market volatility. The economic and financial markets are cyclical and fluctuating. While additional risk could provide more growth opportunities, more risk also welcomes more volatility during adverse market times. There is no fear of growth allocation. However, it must be justified both economically and emotionally.
It boils down
The structure of your retirement portfolio depends on your risk tolerance, needs, lifestyle and other factors. Consider evaluating these considerations as you approach portfolio design.
Tips for finding a financial advisor
Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool pairs you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Consider a few advisors before choosing one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
Preston Cherry, CFP® is a financial planning columnist for SmartAsset, answering questions from readers on personal financial topics. Do you have a question you would like answered? Send an email to AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Preston is not a participant in the SmartAdvisor Match platform and has been compensated for this article.
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