When it comes to investing, one of the well known trade offs is that you give up yield if you want greater safety. Keeping your money in a savings account might seem like the safe move if you want to protect your capital, but your return isn't going to be very high.
As you approach retirement, you can't afford to take as many risks. When you were younger and in the building phase of your nest egg, you could afford to have your money in assets that offered higher returns, but also included more volatility and risk.
The story is different now that you are getting ready to retire. You can't afford to have your assets affected by a huge drop in the market right before you need to start using the money in your nest egg to live on. If you're looking for a little security, but still want some yield, here are some ideas to help you make the most of your portfolio.
Try using buckets. Due to longer life expectancy, there is a good chance that you will end up living for 30 or 40 years in retirement. This means that some of your capital still needs to be at work, even as you live off some of your nest egg. One strategy that has gained popularity in recent years is the idea of "buckets."
With this plan, you take money that you know you will need in the next five to seven years and keep it mostly liquid in safe short-term investments. You can keep this money in cash for easy access or boost your returns with the help of a CD ladder or with a money market account.
The next bucket contains assets you won't need for another six to nine years. You keep this money in assets that have high yields that you can rely on, but aren't as likely to be problematic in the event of a stock market crash. Bonds are often reasonable choices for this bucket. TIPS can help you stave off inflation, and municipal bonds often offer pretty decent returns with extra tax advantages. Certain dividend paying stocks, such as dividend aristocrats, are also an option for this bucket.
Your third bucket should be assets you know you won't need to touch for more than 10 years. This is where you can keep certain stocks and other riskier assets. This long-term bucket provides your portfolio with the opportunity to continue with solid capital appreciation. It's also a good way to keep the portfolio growing, while allowing time to smooth out bumps in the market.
This strategy requires that you rebalance regularly. You will also need to move money from bucket to bucket as your retirement progresses.
Consider the right annuity. Salespeople have pushed many investors into expensive annuity products that aren't right for them. For example, variable annuities often have high fees, complicated mechanics and "guaranteed" benefits that aren't quite as they seem.
However, the right annuity product can protect a portion of your income while you grow the rest of your portfolio. You probably don't want to convert your entire nest egg to an annuity, but using a portion of it to purchase an immediate annuity or a hybrid annuity can provide you with a degree of income security that won't be affected by the market. You can then boost your overall portfolio yield by investing in dividend stocks or other assets that provide you with a better return.
Retirement is likely to last a few decades, so it's vital that you consider how you can boost your yield during retirement. Combining strategies can help ensure that your money lasts longer than you do.
Jeff Rose is a certified financial planner, U.S. combat veteran and the founder of GoodFinancialCents.com.