How to Build a Resilient Retirement Portfolio

Key Takeaways

• It is important to have sufficient cash on hand to supplement recurring retirement income sources, such as steady passive income from alternative investments.

• There are several safe investment vehicles available that retirees can tap into, including Treasury bonds, CDs, money market accounts, and annuities.

• A CD or bond ladder strategy may be a viable strategy as an alternative option for managing individual investments, allowing the investor to quickly respond to interest rate changes.

Every day in this country, some 10,000 individuals turn 65, and by 2050, the number of people who reach that milestone will surpass 88 million – 20 percent of the nation’s population, according to U.S. News. 

Whether retirement is nigh or decades away, there are moves one can make to ensure their Golden Years are the best they can be. From assessing needs and investment approaches to creating reserves and managing investment risk, such actions can help construct a strong retirement strategy. 

Here is how to build a resilient retirement portfolio.

Unique Needs in Retirement

In general, retirement is about transitioning from wealth accumulation to wealth preservation and distribution. This turning point calls for a whole other set of approaches.

After all, there is health care to consider, as well as cash flow management, possible inflation management, deciding where to live, and, yes, how to manage investments during retirement.

According to the recent BlackRock “Read on Retirement” surveys, some 64 percent of those still working, and who are actively saving, are concerned about having sufficient funds to last throughout their retirement. In fact, rising life expectancies mean that retirement savings could need to last 20 years or even more.

Note that Social Security retirement benefits will supplant only around 40 percent of pre-retirement earnings. Thus, supplementation in the form of savings or investments is needed.

Setting a Strategy for Your Retirement Investments

Even in pre-retirement and retirement, one should have a clear vision concerning how best to invest and strategize. Here are strategies to consider:

• Make a clear-eyed assessment of spending needs.
• Be certain that the investment portfolio is adequately diversified.
• Do not make investment decisions based on fear or emotion.
• To protect income, consider annuities.
• Make tax efficiency a portfolio goal.
• Have sufficient cash on hand for short-term goals and emergencies.
• Lessen risks of sequence of return.
• Have sufficient income-producing equities in the portfolio.
• Consider employing a financial planner.
• Be certain the estate is properly managed.

Set Aside One Year of Cash

It is important to have sufficient cash on hand to supplement recurring retirement income sources, such as steady passive income from alternative investments.

Some insights recommend setting aside one year of cash for retirement. At the beginning of every year, people should be certain they have sufficient cash in a liquid account to supplement their annual income from rental properties, Social Security, pensions, annuities, or other sources.

Build a Short-term Reserve

It is also important to create a short-term reserve in one’s retirement investment portfolio. Such reserves should be equivalent to two to four years’ worth of living expenses and may be invested in high-quality, short-term bonds or other fixed-income investments. Such reserves can help retirees survive a protracted market downturn.

Safe Investment Options

There are several safe investment vehicles available that one can tap into, such as:

• Treasury bonds. These are fixed-rate U.S. government debt securities that have a maturity range of 10 to 30 years. 
• Certificates of Deposit (CDs). These are savings accounts that hold fixed amounts of money for fixed time periods, with issuing banks paying interest.  
• Money market accounts. These are deposit accounts that pay interest based on existing money market interest rates. 
• Annuities. Annuities can provide individuals guaranteed income throughout their retirement.

Bond Ladder Strategy

A CD or bond ladder strategy may be a viable strategy as an alternative option for managing individual investments, allowing the investor to quickly respond to interest rate changes.

It involves having a portfolio of individual bonds that mature on varying dates. An investor might be able to construct a 10-year bond ladder with a bond reaching maturity each year. As bonds toward the ladder’s lower end mature, proceeds may be reinvested in new long-term bonds in the long end.

Ultimately, the strategy involves purchasing bonds with different maturity dates, allowing the investor to quickly respond to interest rate changes.

Invest the Rest of Your Portfolio

The balance of one’s retirement portfolio should be invested based on personal goals, risk tolerance, and time horizon. A retirement calculator can make a big difference here.

To reduce risk, and possibly increase returns, it is important to hold a mix of stocks, bonds, and cash investments. Such diversification, which can include alternative assets such as art and real estate, can generate growth, provide income, and preserve capital. 

Note that over time, as personal or external situations change, there may be a need to adjust investment strategies.

Create a Withdrawal Strategy

It is key to retirement to have a funds withdrawal strategy, following recommended timeframes for creating one. One recommended approach is to draw down four percent of one’s retirement account annually.

For example, following the four percent rule, if one has $1 million saved for retirement, $40,000 may be spent in the first year of retirement. At the start of the second year, the amount is adjusted based on the inflation rate. In the third year, one would take the prior year’s permitted withdrawal,  the amount is adjusted for inflation.

Strategies for Managing Risk

As no investment is risk-free, it is vital to manage risk to reduce potential losses so that retirement funds remain as sound as possible, and generational wealth can be built and passed on.

In general, using fixed-income securities, some of which offer periodic payments, lets investors recoup capital during the life of the investment. This lowers investor risk, since not all monies must be returned following a prospectively protracted bond term. 

Individuals may also use some risk-specific insurance products to protect themselves against specific identified exposures that may not fall under a traditional insurance policy.

Overarchingly, it is wise to establish a resilient and flexible retirement plan – one that can be adjusted based on changes to personal health, finances, or the market. 

Note that there is a difference between systemic risk and unsystematic risks. The former refers to the inherent risk of a market segment or the entire market, not a certain stock or industry.

By contrast, unsystematic risk — also called company-specific risk — is a risk associated with a certain investment. Because such risk can be lessened through diversification, the term is also known as diversifiable risk.

Diversification means spreading one’s investments around so that exposure to any single risk type is reduced, which can also reduce portfolio volatility and protect against inflation.

Alternative Investments and Portfolio Diversification

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

Having the kind of retirement one seeks generally does not happen by accident. In fact, it takes a good deal of preparation, including making sure plans have room for future adjustments due to changing health, financial, or market conditions. It is also crucial to mitigate investment risks through asset diversification.