Since 2000, the WE dollar has lost an incredible 44.2% of its purchasing power. Government reports Bureau of Labor Statistics, the official tracker of inflation statistics, indicates that inflation could be worse than we think. Even if interest rates remain at their lowest, Federal Reserve policies can push inflation higher.
What does this mean for retirees and pre-retirees?
If you have an advisor or a team of advisors, I’m sure they’ve mentioned the idea of “diversification” to you at least once. By 2020, however, the concept of diversification had gone from a “good idea” to an absolute necessity. Diversification or the development of so-called “hybrid” retirement strategies is essential to avoid the most dreaded scenario of a retiree: outliving his savings. Several asset classes, especially cash flow assets, seem to be the only remedy to thrive in an increasingly volatile investment landscape.
Good diversification and risk reduction are part of well-designed and personalized financial plans. Contrary to what some advisors preach, there are no shortcuts, no “one size fits all” templates to shorten the process. Portfolio allocation is unique to each individual. Some financial advisors and educators believe that investing in every asset is the only way to ensure a diversified plan.
How do we manage to diversify?
Many people don’t want to spread their money across multiple assets because they find it too difficult to monitor and maintain. If so, retirees and those approaching retirement should consider several potential sources of income streams. Each of these assets offers different benefits and risks, as well as growth potential.
Social Security: Although a reliable source of income, retirees should not Social Security as the only source of retirement income. In 2020, Social Security paid on average $1,503an amount insufficient to meet the needs of most retirees.
Fixed Instruments: Debt instruments that pay fixed interest, such as bonds, are commonly used to build various retirement plans. Interest on these types of assets is generally paid on a semi-annual basis. The invested capital returns to the investor at maturity.
Stock Market: Although the market offers high growth potential, recent volatility makes it clear that such growth often comes with higher risks.
When considering this option, it is essential that you clarify the level of risk you are willing to take and whether or not you have time to recover from any losses you may incur. The COVID-19 pandemic has made from Wall Street even more unpredictable outcomes, meaning it could take years for seniors who invest too heavily in the market to recover from a downturn. Retirees may find that they need to withdraw larger amounts of their money when stock prices are falling, leading to faster depletion of retirement savings.
Be sure to consult with a knowledgeable financial planner to determine if you have the right amount of money invested in stocks.
“Safe” vehicles: Safe products such as permanent life insurance and annuities are the cornerstone of a healthy retirement. Instead of adding these proven products as an afterthought, it makes sense to build your portfolio around them. Owning low-risk, tax-advantaged products, many of which offer guaranteed income streams, will help you in a number of ways.
You can plan better knowing that you have a predictable source of income. Plus, unlike stocks and other assets, your capital is protected. And you have the opportunity to use these products to create a legacy for your loved ones. Safe money products like annuities and life insurance also have unique tax advantages that other cash management tools lack.
Depending on your appetite for growth and your tolerance for risk, there are other opportunities to diversify your retirement portfolio. Before committing to any of these more “exotic” investments, you need to spend some time doing your research and due diligence. Then talk to a trusted advisor who will tell you the TRUTH about money and not just try to sell you something.
Financial mistakes can interfere with your happiness when you are no longer working. The good news is that leveraging viable alternatives to traditional planning and creating a safer, more robust “hybrid” portfolio can help you avoid making these mistakes.
Lyle Bossa native Utah, is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management. financial boss, 955 Chambers St.office 250, Ogden, UT 84403. Phone: 801-475-9400.
