The basis of the strategy is that when you stop working, you may need to withdraw from your portfolio to supplement your income. As there is no more income to build the portfolio, taking excessive risk is dangerous. However, not taking enough risk may lead to the portfolio lagging behind withdrawals, inflation, and taxes. It is important to consider two factors that are different now than they may have been when this strategy was being regularly recommended.
- One, cash investments are not paying the same interest rates they were 20 years ago. Keeping your portfolio heavily invested in short-term bonds and CD’s may not be sustainable throughout your retirement if interest rates remain this low.
- Two, life expectancies have significantly increased, and someone who retires at age 65 could have another 20 – 30 years of life ahead of them.
If you look at an investment strategy* without age as a factor, and look at two components, time-horizon and risk tolerance, someone who has a 25-year time horizon (period of investing), and a high tolerance for risk, may not be properly invested with a portfolio of 80% bonds & 20% stocks. You want to keep a strategy that works for you and build up cash in the portfolio as needed throughout the year. This will keep the bulk of your investments working for you.
When it comes to your portfolio, it is important that you are invested in a strategy that aligns with your willingness and ability to take risk:
- Willingness: What is your tolerance for risk? You can gauge your risk tolerance by completing a questionnaire to determine if you are risky or conservative or somewhere in between.
- Ability: What is your ability to take risk based on a long-term financial plan that takes into account all of your resources and expenses?
It can be beneficial to have a financial advisor look at the investor’s goals and assets to get a holistic approach to investing.
Please reach out to your Baron Team with any investment questions
*Disclosure: Past performance is no guarantee of future results. Every investment strategy has the potential for profit or loss. This material is not intended to be relied upon as a forecast, research or investment advice.