How To Clean Up Your Investment Portfolio Before Retirement | Smart Change: Personal Finances


(Sam Swenson, CFA, CPA)

In an environment marked by steadily rising inflation data, rapidly rising interest rates and staggeringly low consumer sentiment, aspiring retirees have every reason to feel uneasy about the years ahead. . While a recession is by no means a guarantee, we are beginning to see the characteristics of what could be an extended period of economic downturn. However, retirements will still happen, and it’s best to understand how to handle such a period should it materialize.

Let’s recap some simple but effective ways to shore up your retirement portfolio.

Consolidate if possible

If you have old 401(k), IRA, or other accounts at different institutions, retirement is a great time to merge similarly taxed accounts and commit to one or two financial institutions. Not only does this reduce paperwork, tax forms and passwords, but it’s much easier to manage your investment and tax situation when you can see everything at a glance.

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It’s not just about administration: if you have accounts scattered across multiple institutions, chances are you’re holding a few very expensive funds or paying excess management fees somewhere. These high costs can dramatically reduce your investment returns, leaving you with less than you could otherwise enjoy in retirement.

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Ditch single stocks

If you have small positions in a single stock as part of your larger portfolio, now is a great time to move on. Individual stocks carry company-specific or “idiosyncratic” risk, which is the inherent risk associated with owning stocks of a single company. You can remove this risk by committing to diversifying your portfolio and focusing on factors you can control, such as how much you save and providing an appropriate asset allocation.

Also, given that the broader market has corrected more than 20% since the start of the year, there’s a good chance you’ll owe less capital gains tax if you decide to exit your individual positions now. Of course it depends on who individual stocks you own, but if there ever was a time to rebalance them, that time has probably arrived.

Re-engage in index funds

Index funds do a lot for retirees. They help keep costs down, which has proven to be a major factor in keeping After your return on investment. Perhaps most importantly, index funds help you reduce the time spent managing your portfolio, which in retirement couldn’t be more valuable. Simply select a fund that follows the S&P500 and a fund that tracks the broader bond market may be enough for you.

Taking a 10,000 foot view of your portfolio and allocating investments to diversified index funds is likely to produce a return close to the overall market return, which tends to outperform the vast majority of active investors. Passively accepting the overall market return instead of picking individual stocks is probably the right answer in terms of tax efficiency and time savings, so consider a hands-off approach when you retire.

Build up a cash reserve

Even with unusually high inflation figures, cash is still king, especially in bear market economies. Even though you know inflation will reduce the purchasing power of low-yielding investments like cash, you’ll still need a healthy reserve fund to cover unforeseen emergencies.

Relying on the stock market to cover unexpected expenses is a risky proposition in retirement. Conversely, knowing how to have a reasonable reserve of money in the event of a disaster brings great psychological comfort. Having an accessible, fully liquid, high yielding savings account is the best place for this section of your portfolio; there is no need to get creative with a brokerage account.

Tighten up your financial life

The more dispersed your life is in retirement, the more time you will spend making sense of it and the more stress you are likely to encounter. Take the months leading up to retirement to make sure you’re doing everything you can to make your life as simple as possible. By consolidating your investments, switching to single stocks, re-engaging in index funds, and establishing a cash reserve, you’ll do all you can to ensure a peaceful retirement experience.

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