Retiree Portfolio Makeover: Expert Advice on Adjusting Asset Allocation Post-Retirement

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Retirement planning boils down to one goal: not running out of money before kicking the bucket. 

Unfortunately, workers go into retirement without many of the facts. They don’t know how long they’ll live or what kind of health-related expenses they’ll incur later in life. No one knows how financial markets will perform or how fast inflation will devalue saved dollars. 

So how can retirees plan their investments and finances with so many unknowns? 

Follow these tips from financial experts to stay afloat and adjust your asset allocation after leaving the workforce. 

Review Your Retirement Plan — Again

Jake Falcon, founder of Falcon Wealth Advisors, reiterated that retirement planning revolves around, well, a good plan. And you may need to adjust that plan and your asset allocation as you go further into retirement.

“Do you know how much you will need to live off of in retirement to maintain your desired lifestyle? We typically start with the goal of replacing 100% of your take-home pay that you received while working while also factoring in health insurance and any other retirement costs,” he said.

Many financial advisors say that retirees can get away with less income in retirement, but Falcon pushed back on that assumption. “We often see retirees spend more in their early ‘go-go’ years immediately after retirees leave their company job,” he explained.

Know What Your Taxes Will Be

The less money retirees lose to taxes, the less money overall they need saved in a nest egg. So, it’s important to review your assets and determine what the tax hit will be.

“Tax planning is critical in retirement,” explained Stuart A. Schiffman, certified financial planner (CFP) and founder of Compound Wealth Advisors. “Income distribution from retirement accounts can have a serious impact on lifetime taxes paid.” 

Schiffman recommended moving as much money as possible to Roth retirement accounts. They grow and compound tax-free, and you pay no taxes on withdrawals in retirement.

“Actual financial planning should begin years before retirement. Consider converting some of your tax-deferred retirement accounts to tax-free accounts through a taxable Roth conversion,” he said.

Reduce Risk Exposure

Sara Routhier, managing editor of Loans.org, noted that investors’ risk tolerance should shift as they enter retirement. “When you are younger, you can take greater risks with your investments since there is more time to recover from economic downturns. Once you retire, your focus should be on maintaining that investment in a safe and secure portfolio,” she said.

That’s because retirees face a unique risk called sequence of returns risk — the risk of a market crash or negative market returns early in their retirement. The timing matters, because an early crash can lead retirees to sell off too much of their portfolio while stock prices are low. When stocks eventually recover, they’ve already sold off too many stocks for their portfolio to recover fully.

That’s why it’s important to adjust your assets based on risk tolerance in retirement.

Build a ‘Bond Barricade’

Once in retirement, retirees may want to consider adjusting their asset allocation more toward bonds. With enough bonds to live on for years, retirees can avoid having to sell off any stocks if the market collapses. 

“We like to hold at least five (and ideally 10) years’ worth of distributions in a diversified portfolio of investment-grade bonds,” Falcon said. “A normal market cycle from peak to trough can last five years or longer, so we want to make sure we have cash flow taken care of in the event of a bear market.” 

In addition to living on bond interest, retirees can build a bond ladder, so their bonds mature at regular intervals in the early years of retirement.

Shift to More Income-Oriented Stocks

Not all stocks are created equal. Some companies — especially smaller, less established ones — aim for fast growth to drive their stocks’ returns. But with that growth comes volatility and risk.

Often, more mature, established companies have little room for growth, but they earn stable revenue. And they pass that revenue along to shareholders in the form of dividends. 

“Beyond bonds, dividend-paying stocks and [real estate investment trusts] support stability,” explained Anthony Saccaro, a financial advisor and president of Providence Financial & Insurance Services. “Investments that pay interest and dividends are generally more conservative and help preserve principal, which fits well with how retirees should be focused.”

As an ongoing source of income, retirees can think of these investments as the golden goose, consistently providing income to live on. 

Consider Annuities Based on Risk Tolerance

Peace of mind matters just as much as the math of retirement planning. Retirees who want guaranteed ongoing income can get it by buying annuities.

“There are programs that will transfer that risk, such as an insurance company through annuities,” said Steve Azoury, founder of Azoury Financial. “For a fee, they will provide a lifetime of income that will never stop and that would alleviate some anxiety in retirement.”

Use the Two-Thirds Rule

Doug Ornstein, director at TIAA Wealth Management, recommended that his clients collect two-thirds of their retirement income from sources that are guaranteed for life.

“Guaranteed sources can include Social Security, pensions or annuity income. The remaining one-third can come from portfolio withdrawals,” he said. “Most retirees will face market risk, inflation risk, cognitive risk and longevity risk. Having multiple streams of income, including a majority from sources guaranteed for life, addresses all four of those risks in some capacity.”

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