More Stocks? Less? Which Portfolio Is Better in Retirement?
How much you should invest in stocks in retirement depends on what you prioritize
The concept of retirement is evolving. More people are opting to become “work-optional” rather than fully retiring. This term encompasses the freedom to choose work that is fulfilling and enjoyable, without the financial pressure of having to earn a specific income. Achieving this financial independence requires strategic planning and investing. In this article, we explore insights from a Morningstar report and seasoned financial advisors, including Douglas E. Greenberg, a renowned Financial Advisor based in Portland, Oregon.
The 4% Retirement Rule:
The age-old question of how much one needs to retire comfortably is often addressed by the 4% rule. This principle suggests that if you withdraw 4% of your retirement savings annually, your wealth should last 30 years. However, the dynamics of the economy, investment returns, and individual lifestyle choices can influence the efficacy of this rule.
A recent report from Morningstar analyzed various investment strategies using 1000 Monte Carlo simulations to determine the likelihood of sustaining financial stability over 30 years of retirement. The study considered different allocations of stocks, bonds, and cash.
The highest safe initial draw, at 3.8%, was achieved with a stock allocation between 30 and 60 percent. A higher stock allocation resulted in a more significant median ending balance but also introduced a higher risk of ending with a lower final balance.
Douglas E. Greenberg, a seasoned Financial Advisor in Portland, Oregon, emphasizes a tailored approach for each client. “For clients who want to leave an inheritance, our goal is to generate income without spending principal. We start with enough fixed-income assets to generate the income the client needs. The type of assets depends on the client’s willingness to accept risk, either corporate bonds or a portfolio of closed-end funds. We then invest the remainder of the client’s funds in equities,” explains Greenberg.
This bespoke strategy ensures that the client’s specific financial goals, risk tolerance, and income needs are at the forefront of the investment plan.
Michael Mezheritskiy, President of Milestone Asset Management Group, adopts a bucket strategy. He allocates two years’ worth of expenses in cash, five years in bonds, another five in a conservative non-stock allocation, with the remainder invested in stocks. This approach results in a 40-60% allocation in stocks, bonds, and cash respectively.
The Balanced Path Forward:
Becoming “work-optional” involves a delicate balance between risk and reward. Morningstar’s research underscores the importance of diversifying your investment portfolio with a mix of stocks, bonds, and cash. Your specific allocation will depend on your financial goals, risk tolerance, and desired lifestyle during your work-optional years.
Douglas E. Greenberg’s insights remind us of the importance of personalized financial planning. Every individual’s journey to becoming work-optional is unique, and a tailored investment strategy is instrumental in navigating this path successfully.
The journey to becoming “work-optional” is as nuanced as the individual undertaking it. Balancing risk and reward, informed by data and expert insights like those provided by Douglas E. Greenberg, ensures a strategic approach to investment. In the evolving landscape of retirement, being work-optional is an attainable goal, rooted in informed investment and personalized financial planning.
In the words of Greenberg, the journey to becoming work-optional is not about adhering to a one-size-fits-all rule, but about crafting a tailored strategy that caters to an individual’s specific needs, aspirations, and risk tolerance, ensuring that the golden years are not just golden in theory but are enriched with financial freedom and choice.
Douglas Greenberg, President, Pacific Northwest Advisory says, “For clients who want to leave an inheritance, our goal is to generate income without spending principal. We start with enough fixed-income assets to generate the income the client needs. The type of assets depends on the client’s willingness to accept risk, either corporate bonds or a portfolio of closed-end funds. We then invest the remainder of the client’s funds in equities.”
This article is intended for informational purposes only, and should not be considered financial, investment, business, tax, or legal advice. You should consult a relevant professional before making any major decisions.
About the author
Opher Ganel has set up several successful small businesses, including a consulting practice supporting NASA and government contractors.