Wealth Wise is Kiplinger’s advice column on navigating retirement-related dilemmas. Got a question? See below for how to send it to us.
Dear Wealth Wise: My partner and I are both 75, with an approximate net worth of $1.5 million. I am retired and he is still working. When he retires, we will both have fairly generous pensions and Social Security. Right now, we have a fairly aggressive portfolio with a tenth of it invested in a momentum tech stock. We are around 60% stocks and 40% fixed income (the classic 60/40 portfolio). The fixed income is primarily held in bonds and high-interest CDs. Is our strategy too aggressive for our age? We live modestly and have no debt. I have a long-term care policy. He does not. — Comfortably Cautious
Dear Comfortably Cautious: Between your partner’s current salary and your future guaranteed income from pensions and Social Security, you are in an enviable position relative to the retirement savings and income of most people in their 70s. Given this scenario, you have the luxury of letting your $1.5 million portfolio continue working hard in the market, but with some limitations.
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When you’re in the process of building wealth for retirement, it’s generally a good idea to invest heavily in the stock market, whether by holding individual company shares or relying on exchange-traded funds. Once you’re actually retired or getting close to retirement, it’s important to be more careful.
This doesn’t mean you need to dump your stocks altogether. But retirees are commonly advised to limit their stock holdings to protect against market volatility. Let’s see what the experts have to say.
A portfolio that’s 60% stocks is generally reasonable
It’s important to maintain a reasonably robust stock allocation in your portfolio during retirement so your money is able to grow and, ideally, outpace inflation.
Nathaniel Tilton, private wealth adviser and owner of Tilton Wealth Management, says this investment mix can certainly be reasonable.
“The key question,” he says, “is whether your portfolio is designed to support your lifestyle or to maximize growth. At this stage, it should primarily do the former.”
Matthew Gaffey, President at Corbett Road Wealth Management, says a 60% portfolio may not be too aggressive for some retirees. But it really depends on the specifics of your situation.
“If the majority or all of your expenses are covered by your pensions and Social Security, it’s highly likely that you’re not too aggressive and could potentially even take on more risk if creating a legacy was of higher importance and you chose to do so,” he says.
However, Gaffey cautions, “If the pensions and Social Security are only covering a fraction of your projected spending, it would be critical to examine your withdrawal rate relative to the remainder of your portfolio to determine an appropriate level of risk.”
Finally, given that your partner is still working, you are presumably not drawing down the investment portfolio. That also points to your ability to take on more investment risk.
Concentration risk is an issue
While a 60% stock allocation in retirement doesn’t automatically scream trouble, Tilton says you may be taking on undue risk with your specific approach.
“The biggest concern isn’t your overall allocation. It’s the concentration risk. Having 10% of your portfolio in a single momentum-driven tech stock introduces a level of volatility that’s typically unnecessary at this stage of life,” he says.
As Tilton explains, a sharp decline in that single position could have an outsized impact, even if the rest of the portfolio is well-constructed.
“I’d suggest gradually reducing concentrated positions, maintaining a diversified allocation, and ensuring your fixed income is structured not just for yield, but for liquidity and flexibility,” he says.
Keep in mind that selling off 10% of a $1.5 million portfolio ($150,000) in a highly appreciated stock could trigger a huge capital gains tax bill. Consult a tax adviser for a strategy to unwind this holding efficiently.
Your reaction to volatility makes a difference, too
Gaffey cautions that too much portfolio risk could be a dangerous thing, more so because of your potential reaction than a short-term portfolio decline.
“For many,” he says, “a different mindset sets in after their normal working paychecks stop. … It was easy to ride out market volatility when they were working. … After they flip the retirement switch, suddenly the money they’ve saved for years becomes more real to them, and they become more sensitive to the potential impact that every price movement in the market could have.”
The danger, Gaffey explains, is “the investor overestimating their risk tolerance in an up market, followed by a risk adjustment and overreaction to market volatility.”
In other words, if you don’t actually have as high a risk tolerance as you think you do, you may be tempted to liquidate assets out of fear when the stock market takes a dive. That could result in permanent portfolio losses that are tough to recover from, so it’s important to be mentally prepared for a temporary decline in portfolio value.
Make sure you’re looking at the big picture
A portfolio like this isn’t overly concerning to Christopher Walsh, financial advisor at Capital Choice Financial Group.
“If you’re both getting pensions and Social Security and living modestly with no debt, you likely aren’t going to need to touch that $1.5 million for day-to-day living,” he says. “In that case, the market can do its thing, and a little aggression isn’t likely to hurt you.”
A potentially bigger issue, says Walsh, is where that $1.5 million is being held. If it’s in qualified accounts subject to required minimum distributions (RMDs), such as traditional IRAs or 401(k)s, Walsh explains, Medicare surcharges known as IRMAAs could become a real issue.
“The tax conversation is way more important here than the asset allocation conversation,” Walsh says.
The other thing that jumps out to Walsh is the long-term care gap.
“Traditional long-term care coverage at that age is going to be difficult and expensive,” says Walsh, referring to the fact that only one of you has a policy. However, he says, “If you have non-qualified assets, there are asset-based long-term care options worth looking at. The RMDs are actually going to push money into non-qualified territory over time anyway, so that’s worth a real conversation.”
You’re not in bad shape, but the plan needs some tweaks
All told, you can relax (for the most part)! You’re in a reasonably strong place when it comes to retirement income. But a few modifications to your plan and investments may be warranted.
“Overall, you’re in a good position, but a bit more emphasis on simplicity, diversification, and risk management would go a long way,” says Tilton.
Walsh agrees.
“The investments aren’t what I’d lose sleep over here,” he says. “The taxes and the long-term care gap are the things that could actually hurt you.”
Addressing those key factors could put you in an even more solid position as you glide into this next stage of life.
Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our writers and experts in this advice column are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial adviser regarding any questions you may have in relation to the matters discussed in this article.
