How to Rescue Your Retirement Portfolio

How to Rescue Your Retirement Portfolio

On the 40th episode of the Retirement Explained show, I’m talking about how you can rescue your retirement portfolio.

There are a couple of things that you can do that will have a big impact on the health of your portfolio, your ability to retire early or on time, and your ability to stay retired.

On today’s episode I talk about:

Make sure you know your risk tolerance

It’s really important to have a good understanding of your risk tolerance. I think risk tolerance is something that is glossed over too often, even among financial advisors. It can be, too often, a checklist that is whipped through for compliance reasons that neither the client nor the advisor really pay regard to.

As a client, you want to understand how you’re going to really react when markets tumble and your statements look substantially different than they did before said market downturn.

That’s it.

We want to understand this one simple question: what’s your limit before you reach your emotional breaking point and how close do you want to get to that line?

The best risk tolerance questionnaires, as it were, are done by looking at how you reacted during past market downturns; how you felt during those times when the market was in a panic. How did you feel when the world seemed to be falling apart? How did you react during that time?

We just had one of those this past March, so I would be thinking long and hard trying to re-visualize how that felt when markets were down 10% in one day. If your reaction was “things are crazy right now, I’m not looking at my statements”, that tells you a lot more than any risk tolerance questionnaire, for instance.

Pay attention to your short-term income and cash needs

Typically, I don’t like to have money that I know my clients are going to need within the next two or three years subject to market volatility.

For our purposes, that means we have that money in cash, or some sort of FDIC insured investment and it’s an important part of financial planning to set aside monies that you’re definitely going to need in the near term. It might not be a very sexy part of your financial planning strategy, but it’s something your financial advisor should be doing when approaching your portfolio and if you’re doing it yourself, it’s an important tool in the toolbelt you should be aware of.

Delay your Social Security benefits

This is a big one. Often, you can substantially impact your net worth throughout your life by delaying your Social Security benefits. And while, I’ve seen individuals express concerns about delaying Social Security for different reasons, most of the time it’s a great idea to delay it as long as possible.

You get penalized if you take your benefit early (like at 62 years old) and you get a bonus if you take it later (like at 70 years old) and if you take it later, you’re going to lean on your retirement savings to bridge the gap between when you retire and when you begin taking your Social Security benefits. That’s perfectly fine and is not something that should incite chagrin.

Often, when we run retirement planning scenarios, clients will have twice as much money throughout their lives if they delay their Social Security as long as possible and it’s definitely something you should be considering.

Consider alternative investments to your portfolio

Most portfolios are made up of stocks and bonds; stocks in small, medium, and large companies both foreign and domestic, and bonds made up of short, intermediate, and long term durations. Pretty standard issue stuff.

Consider alternative investments to spice it up, but don’t go crazy; if you play with fire you can get burned.

Consider adding some gold to your portfolio, Bitcoin, emerging market investments. Things like this can add some pep and some returns to your portfolio, but can also be a drag. Remember, the higher the risk, the higher the reward, but also the higher the chance of getting burned.

Plan for retirement with a retirement planning app/retirement planning software

Most advisors use some sort of financial planning software, so if you’ve got an advisor, you’re probably good to go. If you’re a DIY investor, there aren’t a lot of excellent planning tools available that will blow your socks off, sadly.

There’s an app I came across called Silvur that I like if you don’t want to work with someone like me on your financial planning. It’s good, but doesn’t really come close to the tools your advisor has available. But I’ve said this before and I’ll say it again; if you’re in the ‘accumulate wealth’ phase of life (pre-retirement) you might not need something beyond Silvur (or the free tools that come with Vanguard, Fidelity, or Charles Schwab). Pre-retirement is pretty straight forward…save as much money as possible and buy assets.

If you’re in the ‘distribute wealth’ phase of life, I’d want something better than Silvur and I wouldn’t try to wing it; the stakes are too high and turning your wealth into an income stream that will last decades takes some finesse.

Pay attention to your asset allocation

Asset allocation is about how your investments and money are spread out among different investments and asset classes. This is super standard stuff when working with a financial advisor and can sometimes be overlooked by the DIY investor.

Your advisor should be rebalancing your portfolio regularly and if you’re a DIY, you should do the same.

Maximize contributions to your retirement accounts

I have a client that ended 2020 with twice as much money in her retirement accounts than when she started the year. Not all of that was growth of her assets. A good amount were her contributions and while investment returns are important, what we’re really trying to accomplish is get your retirement accounts to a certain size…it doesn’t matter how they get there, whether through returns or through contributions…the sooner they get big enough the better and the sooner you can quit your day job!

-Brian