Managing Your Retirement Portfolio

Retirement income management is all about making sure your retirement savings provide enough income for your needs, and that you don’t outlive your assets. This starts with setting up and managing a portfolio that's right for you.

The amount of money you have when you begin retirement is one of the most important factors in determining how to manage those assets during retirement.

If you have a large enough portfolio, it may generate enough income so that, with prudent spending, you never need to dip into your principal. If that is your situation, a combination of bank products such as CDs and Treasury bonds to preserve your principal, along with dividend-producing stocks and bonds may be the starting point for your investments in retirement.

On the other hand, if you’re like the majority of retirees, you’ll begin retirement with a more modest nest egg that will require you to tap your principal at some point. One important decision is how much to withdraw and from what account(s). Another is how much risk you want to incur, if any, in an attempt to grow your nest egg. You will also want to take into account whether your spouse is still working and how long it will be before he or she retires.

Unfortunately, there are no easy answers or failsafe ways to manage any investment portfolio. But there are some helpful concepts and general guidelines that can help you decide what is best for you, and also avoid serious mistakes that can jeopardize your financial wellbeing.

Reassessing Risk

As you head into retirement, you need to take a fresh look at your level of investment risk, especially the possibility of losing money from your investments. Your timeframe is one of the biggest factors in assessing risk. Because you may no longer have time to recover from market downturns, it’s a good idea to reassess whether the proportion of your assets in higher-risk securities is greater than it should be.

You also don’t want to fall victim to inflation risk—the possibility that the change in prices will outgrow your purchasing power. Achieving the right balance isn’t easy.

If you’re concerned about making your money last your entire lifetime, consider the following questions:

  • What effect will taking money out of your various retirement accounts have on their ability to grow and provide income for life? You will want to consider all of your assets and income sources, the effect of taxes and your unique circumstances when deciding what to do with any particular account.
  • What sources of income can you count on for the duration of your retirement? And what are less predictable? A growing number of Americans can no longer have pensions, leaving Social Security as the only "annuity" income they can count on for life.
  • How diversified are your sources of income? If your investments would perform similarly during market swings, you need to diversify to protect your retirement income.

Asset Allocation

One strategic approach to investing during retirement is to maintain a particular mix of investments in your portfolio that you believe will provide the return you seek, at a level of risk you are willing to take. The process of creating such a portfolio and spreading out your risk is known as asset allocation.

Asset allocation is important because each investment category, such as stocks, bonds or cash, tends to perform differently in different economic conditions. By spreading your investment principal among a number of different types of securities, you are often able to smooth out the ups and downs of your overall portfolio.

Each broad investment type—from bank products to stocks and bonds—has its own general set of features, risk factors and ways in which they can be used by investors. Go to FINRA’s Types of Investments section to learn more.

To manage expenses and make your money last, you will likely have a combination of income-producing and growth investments.

  • Income-producing investments such as stocks that pay dividends, bank products like CDs and bonds are important in retirement because once you stop working you typically need this money to live on.
  • Growth investments, such as growth mutual funds and individual stocks that are expected to grow at a faster rate than their peers or overall market. They tend to come with greater price fluctuations than income-producing investments, but are often recommended by financial professionals to help your retirement portfolio keep pace with, or ideally outpace, inflation.

Throughout retirement, you may wish to adjust your asset allocation gradually. For instance, you might want to move money into different investments in response to a lifestyle change or to accommodate a change in economic conditions. You can find asset allocation help from an experienced investment professional, such as your broker, a registered investment adviser or a financial planner.

Income from Selling Your Investments

Receiving investment income isn't the only way to draw retirement income from your investments. You can also get money by selling your investments if they are worth more than you paid for them.

While taxes shouldn't be the primary consideration in making an investment decision, you should consider the consequences of selling investments you hold in taxable accounts. You may have to pay capital gains taxes on the profit from the sale, as well as commissions to a broker for handling the transaction. If you have owned the investment for more than one year, you may owe capital gains tax. That rate can be 20 percent for people in the highest tax bracket or 0 percent for those in the lowest two tax brackets.

That's likely lower than your regular income tax rate. But liquidating a lot of your holdings during any single year could drive up your tax bill if you don't have offsetting capital losses. So it's important to plan ahead if you'll be selling equities to provide current income. You should also be aware that as of January 1, 2013, the tax code imposes a Net Investment Income Tax of 3.8 percent on investors who meet certain income thresholds and other criteria. To learn more about the tax, who it applies to and how you calculate net investment income, be sure to talk with your tax professional or read the IRS's Net Investment Income Tax FAQs.

Of course, the situation is different if you're selling investments in a tax-deferred account. You pay transaction costs, but no capital gains tax. But when you withdraw from the account, you pay tax on the amount withdrawn at your regular tax rate.

Making Your Principal Last

Making your money last as long as you need it requires a disciplined approach to spending. Experts advise that you don't overspend your first few years of retirement. They also suggest that you be prepared to cut back on extras if your retirement portfolio suffers losses in a given year. The other key to stretching your retirement income is sound management of the yearly withdrawals you make from your retirement portfolio principal.

While there is no "one size fits all" percentage for how much of your nest egg you should withdraw each year, expert opinion tends to cluster in the 3 to 5 percent range. One thing most retirement planning specialists agree on is that you should start withdrawing as conservatively as possible at the beginning of your retirement. One of the arguments for starting off conservatively is that even a well-diversified investment portfolio can fluctuate—sometimes significantly—from year to year. You want to give your portfolio a chance to recover in the event the market takes a nosedive.

It's also a prudent strategy to take inflation into account as you withdraw. Consider building in an inflation rate to your yearly withdrawals. You should note that rising expenses and declining investment returns can take a toll on how long your money will last. Keep an eye on both, and be prepared to adjust your withdrawal rate, if necessary.