Retirement planning is a key component in holistic financial
preparation for you and your family. However, many people find themselves
nearing retirement age with little to show for their many years of work. While
it may feel like you are heading toward retirement without the necessary tools
in place to provide for yourself, don't panic.
The good thing about retirement planning is that until the
day you retire, you can prepare and optimize, based on the current state of the
economy, for potentially greater return. Even if you're over 60, it isn't too
late to start. In order to maximize your retirement savings and live the life
you desire, implement these strategies:
Diversify Your Portfolio
One of the most important facets of long-term investment
success is portfolio diversification. This entails having a portfolio with
stocks, bonds and other investments, and then diversifying within each of those
categories. This is a hedge against losses, and it is an important strategy to
boost performance.
In conjunction with this, investors should avoid having any
more than 3% of their portfolio in any one stock and invest across a variety of
industries. This helps increase the likelihood of that your portfolio will
continue to perform well even if one stock or one industry is taking a hit in
the market.
Diversifying your portfolio is always important for any
investor, but more so for those 60 and older. As individuals inch closer to
retirement, their focus should shift toward consistent yield and limiting risk.
Younger investors may be able to handle higher risk as they have more time to
recover from losses. For those approaching retirement, spreading your money
across a variety of investments helps to decrease the likelihood of significant
loss and may help to increase the stability of your investments as you get
closer to the time you need them the most.
Know Your Portfolio’s Standard Deviation
Many investors focus on using their return on investment
(ROI) to determine whether their savings are performing as expected. However,
this doesn't really tell investors what they need to know about their
portfolios.
In fact, the metric of focus should be standard deviation,
which depicts the portfolio's risk and how consistent returns have been over
time. A low standard deviation indicates greater price consistency than a high
one. For context, the relatively low-risk S&P 500 has a 10-year standard
deviation of 13.56%, so if you are able to handle this investment losing 13.56%
at any given time, you can safely invest in this sector.
If you have a financial adviser, they can help you calculate
your portfolio’s standard deviation and provide you with a forecast of
potential routes to achieve a lower standard deviation with the same return.
There are also a number of online resources to calculate your standard
deviation, such as Yahoo! Finance, Seeking Alpha and Morningstar.
Be Cognizant of Inflation
Inflation is something that investors have little control
over, but there are ways to mitigate it. The big concern is when inflation is
high, it will overtake investment gains. According to a recent study from
Global Atlantic Financial Group, 71% of retirement age investors are concerned
about the impact of inflation on their savings. And while inflation may be
resolved within the foreseeable future, in similar fashion to the importance of
diversifying your portfolio, investors 60 and older have less time to recover
from their losses and need to be aware of the way in which inflation may affect
their retirement investments in the short term.
To protect your investments, avoid investing in many
long-term bonds, which are most susceptible to inflation. Additionally,
identify investments that have pricing power (i.e., they can change their
prices quickly), which helps naturally protect their value from inflation.
Short-term bonds and investments with high pricing power are two key ways to
protect your investments from inflation.
Focus on High-Yield Performers
In order to maximize your portfolio close to retirement, you
must focus on high-yield performers. This includes items like real estate
investment trusts, covered calls and alternate investments, to name a few.
These will allow you to grow your investments more rapidly as you approach
retirement age.
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