If Not a 60/40 Portfolio, Then What?

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The day you retire can be a time of excitement.

It can also be a time of anxiety.

10 Questions to Help You Decide if You’re Really Ready to Retire Early

One of the most difficult decisions we face in life involves determining when it’s time to retire. The thought of telling your employer that, after a certain date, you won’t be coming back for another paycheck is nerve-racking. Numerous questions pop into your mind.

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Do I have enough saved?

Will my nest egg last?

What happens if I get sick?

What if the stock market tanks?

The list goes on.

Far too many people approach retirement with no answers to these questions. Instead, their plan relies on hope — hoping they saved enough, hoping their money doesn’t run out, hoping their health holds up, hoping the market won’t suddenly drop.

Proper Planning Can Help Alleviate Stress

Approaching retirement is much less stressful if proper planning is put in place. Those fearful questions above should all be answered well in advance of retirement, leaving no doubt about the answers.

Over time, of course, the answers may change. Many of the people we meet who are approaching retirement are invested in a 60/40 portfolio, which translates to a mix of 60% equities and 40% bonds. That approach, once considered a tried-and-true method for retirement security, doesn’t work as well these days, especially with a weak bond market that doesn’t hold up its end of the bargain because of rising interest rates. As of this writing, the S&P is down 16% YTD, Nasdaq is down 29%, and bonds are down 13%. A 60/40 portfolio is hemorrhaging.

The good news is there are ways you can structure your portfolio so it will perform well when times are good, but also will help you weather difficult times so you don’t crash along with the market. Today, more than ever, it is important to structure a retirement portfolio that focuses on defense first and offense second.

A Variety of Tools Can Offset Risk When Times Are Tough

It is also vital that the portfolio be adjusted regularly to take advantage of opportunities and to avoid potential pitfalls. While passive investing may work over long periods of time, a more active management approach works better for individuals who are retired or are approaching retirement.

Getting Ready for Retirement? We Explain Key Elements and Options

Using a variety of derivative-based tools can be helpful to offset risk in tough times. These tools employ option-based strategies to predetermine the range of potential results. A couple of options that do that are:

Fixed-index annuities. People have plenty of preconceived ideas about annuities, many of which are wrong. Annuities can be a great tool when used correctly and can be an excellent alternative to bonds in your portfolio.

At my firm, we make use of fixed-index annuities, and there are three ways in which they can be leveraged to benefit you: as an accumulation tool, an income tool and a long-term care insurance tool. Let’s look at each of them.

First, as an accumulation tool, a fixed-index annuity allows you to earn interest based on a stock market index, such as the S&P 500. But there is also downside protection because you can’t lose your principal. If the market goes up, you do well. If it goes down, at worst, you break even.
Second, as an income tool, when you go into retirement, your annuity can be used to buy what essentially is a pension, paying you an amount every month for the remainder of your life. This can bring some sense of relief for those who worry about running out of money in retirement.
Finally, you can also include a long-term care rider for your annuity so that it will help pay for long-term care services should you ever need them.

Buffer exchange-traded funds. These also can be beneficial for investors whose concerns about losing money are greater than their aspirations for achieving extraordinary gains. Buffer ETFs minimize some of the market risks, but still allow for growth through put and call options.

With these ETFs, you buy an underlying asset that is also tied to an index, such as the S&P 500. Returns are typically capped at a certain percentage, but a “buffer” is built in that absorbs some of your losses. For example, the buffer might be set up to absorb a 15% loss. In that case, if your ETF is tied to the S&P 500 and it was to drop 18%, your loss would be 3%. The buffer is created by purchasing a put option that gives you the right to sell its exposure if the index declines in value.

Of course, regardless of how you build your portfolio, you or your financial professional should not just create a retirement plan and think you are done. You can’t assume that what works well today will work just as well next year or five years from now.

Circumstances change. Your personal needs change. The overall economy changes. I regularly update clients’ plans and make tweaks as their needs shift or as events — such as ridiculously high inflation rates — require it.

Are You Rich? The Answer May Surprise You

That’s why it’s worthwhile to have someone in your corner as you plan for and enter retirement. The right financial professional can answer all of your questions and maybe even help you find the answers to questions you would have never known to ask.

Ronnie Blair contributed to this article.

Index or fixed annuities are not designed for short-term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and First Coast Financial Group Inc. are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.

Any comments regarding safe and secure products, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company and are not offered by Brookstone Capital Management.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Bill Aldrich is president of First Coast Financial Group. He is a financial adviser and is insurance licensed in multiple states. Aldrich earned his Chartered Life Underwriter (CLU®) designation and has a bachelor’s degree in mathematics from the University of North Florida. He got his start in the industry in 1986, working for a local financial services firm. He co-founded First Coast Financial Group in 2004 to focus on helping clients make informed financial decisions consistent with their goals for retirement, estate and business planning.