“Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money.” Jonathan Clements
As people are living longer, and the cost of living is increasing, there is a general worry that most retirees’ investments will not last as long as they live. In fact, many people are currently battling to make ends meet. They live from paycheck to paycheck. Therefore, the question that begs is how they will manage once they have retired if they are battling now.
Under the current circumstances, there is no time to worry about ensuring that their investments are significant enough to retire comfortably on. However, it is vital to be cognisant of the fact that very few people can retire comfortably on the 401(k) savings alone. Furthermore, the sooner something is done to remedy this situation, the greater the chance there is of accruing enough capital to retire comfortably on.
If this is your story, the good news is your story can have a positive ending. It is possible to grow your retirement capital by diversifying your investments.
Retirement Portfolio: Reasons to Diversify
Before we look at reasons to increase your post-employment capital through the vehicle of diversification, let’s have a look at what a retirement portfolio is:
In essence, a retirement portfolio is a combination of assets that are made up essentially of real-estate, 401(k) fund, as well as securities, such as stocks, bonds, mutual funds, money market funds and exchange-traded funds.The aim of this portfolio is to achieve a decent long-term rate of return by following a “prescribed set of withdrawal rate rules that will typically allow you to take out 4-7 percent a year, and in some years, increase your withdrawal for inflation.“
That said, here are several reasons why you should diversify your retirement income-stream:
Your Income: Longevity
It is a fact that global life expectancy has been steadily increasing over the last century. New data from the National Centre for Health Statistics shows that the average man born in 2012 is expected to live till 76 years old, while the average woman’s age is projected to reach 81 years old.
Therefore, the theory is that your investment portfolio’s monthly income should meet or exceed your withdrawal rate for at least 20 years from the date that you retire. Because not all investments do well at the same time, it is important to ensure that your portfolio is diversified enough to make up for the annual ups and downs of the different sections of your portfolio.
Your Income: Comfort levels
It’s critical to learn to balance your monthly withdrawals so that you do not run out of money before the end of your life. The challenge with the traditional 401(k) annuities is that they are finite; ergo, if you draw on the capital to increase your standard of living, you will run out of money sooner than you think. You are also not able to continue contributing to them once you have retired. Should you wish to continue to contributing to your 401(k) after you have retired, you can convert your account into an Individual Retirement Account.
Your Income: Risk Versus Reward
Furthermore, you should also adjust your investment strategy. For example, if you embark on a conservative investment strategy at a young age, you run the risk of your investments losing ground against the inflation rate. On the other hand, if your strategy is too aggressive when you are older, you could expose your savings to volatile markets, which could cause your profile lose value.
Additionally, the current global geopolitical and socio-economic circumstances make for challenging investment growth opportunities. Therefore, it is a good idea to try and reinvest as much of your distributions as possible, especially if you do not need to live off your investments for now.
There is no doubt that it is vital to ensure that you build up as diverse an investment portfolio as you can before you retire. Should you wish to actively participate in growing your retirement portfolio, look at opening an account with an online trading partner such as Stern Options. They will guide you and help you grow your diverse investment portfolio.