One question that’s come up several times over the last couple months centers on whether your portfolio should change after you retire. In fact, one person I’ve spoken with recently assumed that once he retired, his advisor would by default sell all the stock funds in his accounts and replace them with income producing bonds.
Typically the longer your time horizon, the more risk you have the capacity to take in your investment portfolio. Most people in their 20s and 30s have a high capacity to take risk, since they have a long time until they’ll need to live off their savings. A significant portfolio loss won’t impact their life, and they have a long time to recover. Because of that, many choose to hold mostly equities in their retirement accounts since they’ll provide the greatest long term returns.
The closer you get to retirement, the lower your capacity to take risk. Prudent investors tend to shift their asset allocations more and more toward bonds as this progression evolves. But for most people it should level out at some point. Most of us will need some growth out of our portfolios in retirement if our assets are going to last the rest of our lives, meaning that we probably don’t want to be 100% in bonds.
But how should our investment strategy change when transitioning from the accumulation to the distribution phases of our lives, and should it change at all? This post will explore the issues, and what you might consider when making the transition yourself.