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Maintaining Targets in Retirement

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Retirement Planning can be thought of as two distinct phases, the accumulation phase, and the spend-down phase. During the accumulation phase, you are growing your retirement savings by contributing to your employer’s retirement plan, and/or setting aside money in your own individual retirement account (IRA).  Once you have retired, you no longer have a source of income from your employer and will begin to take withdrawals from your retirement accounts.  This is known as the spend-down phase. The focus is often placed on how to best save for retirement, but a smart spend-down strategy is equally important to your retirement planning. An integral part of your spend-down strategy is selling assets in a way that keeps your stock to bond allocation in line with your risk tolerance.

While in the accumulation phase, in order to keep a stock to bond allocation that is in line with your risk tolerance, you should be rebalancing your portfolio periodically, by selling positions that are above their target level and buying into positions that are below. By doing this, you are shifting your portfolio to be closer in line with its target stock to bond split.  You can read more about rebalancing in our February blog titled, “Rebalancing Your Retirement Portfolio”.

Typically in retirement, your risk tolerance becomes more conservative as you age.  That said, most investors do maintain a stock allocation, which provides an asset class to buy or sell depending on how the market moves.  Say you are 70 years old with a target asset allocation of 40% to stocks and 60% to bonds.  As the market fluctuates, and you sell your securities for income, be mindful of your asset allocation. If in a given year stocks returned over 21% while bonds slightly increased 3.5%, like they did in 2017, your allocation to stocks may be much higher than your target of 40%1.  When that occurs, and stocks are above your target, take your income from stocks, and if the opposite were to happen with bonds being above your target allocation, take your income from bonds. When you do this, you ensure that your stock to bond allocation stays closer in line with your target allocation.  Selling from an allocation that is above its target can also help you to sell “high” and remove emotional decision making from the investment process.  As the market fluctuates, and you sell your securities for income, be mindful of your stock to bond allocation.


1Source Morningstar, Inc.  Stocks are represented by the Russell 3000 Index and Bonds are represented by the BBg Barc US Aggregate Bond Index.