Q. I’m 55 and I’m hoping to retire in five years. My investments are 65 percent in stocks and 35 percent in bonds. I’m wondering when, if ever, I should pare back the stocks? I have a high risk tolerance, but I don’t want to be stupid.
A. Congrats on getting closer to retirement.
Many investors think they need to pare back their stock holdings when they approach retirement, but that’s not always the way to go.
A reduction in risk at retirement age may not be the best course of action for every investor, said Nicholas Scheibner, a certified financial planner with Baron Financial Group in Fair Lawn.
He said the theory of reduction in risk as you near retirement needs to be looked at more closely.
“The basis of the strategy is, when you stop working, you may need to withdraw from your portfolio to supplement your income,” he said. “As there is no more income to build the portfolio, taking excessive risk is dangerous.”
But, Scheibner said, not taking enough risk may lead to the portfolio lagging behind withdrawals, inflation and taxes.
He said it’s important to consider two factors that are different now than they may have been when this strategy was being regularly recommended.
First, cash investments are not paying the same interest rates they were 20 years ago, Scheibner said. Keeping your portfolio heavily invested in short-term bonds and CDs may not be sustainable throughout your retirement if interest rates remain this low.
Second, he said, life expectancies have significantly increased, and someone who retires at age 65 could have another 20 to 30 years of life ahead of them.
“If you look at an investment strategy without age as a factor, and look at two components, time-horizon and risk tolerance, someone who has a 25-year time horizon and a high tolerance for risk, may not be properly invested with a portfolio of 80 percent bonds and 20 percent stocks,” he said. “You want to keep a strategy that works for you and build up cash in the portfolio as needed throughout the year. This will keep the bulk of your investments working for you.”
When it comes to your portfolio, it is important that you are invested in a strategy that aligns with your willingness and ability to take risk.
Willingness means what your tolerance for risk is. Scheibner said you can gauge your risk tolerance by completing a questionnaire to determine if you are risky or conservative or somewhere in between.
Then there’s ability: What is your ability to take risk based on a long-term financial plan that takes into account all of your resources and expenses?
He said it can be beneficial to have a financial advisor look at your goals and assets to get a holistic approach to investing.
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