[This article appears in our October 2018 issue of ETF Report.]
You spent years building your nest egg, hoping to achieve financial security in retirement. Then suddenly you find yourself here. Retired. Accumulation phase over. Now what?
Investing doesn’t stop because your working days are over, but it takes on a different focus as withdrawal rates take center stage, and managing downside risk—losses you may not be able to recover from—becomes critical.
Unfortunately, there’s no universal recipe for what your ETF portfolio should look like once you’re retired. Asset allocation at this point hinges on individual, specific-to-you metrics such as how much money you need, how long you need it and how much risk you can tolerate.
Kevin Grogan, director of investment strategy for BAM Advisor Services, puts it this way: “The right asset allocation is a function of a person’s ability, willingness and need to take risk.”
Some of those things can change as you move from career to retirement, he says, but the broad guideline is pretty intuitive. According to Grogan, the ability to take risk is largely a function of time horizon—you’re probably more able to take risk if you need your money to last, say, 10 years versus 30 years.
The willingness to take risk naturally goes down the older you get, because going back to work to make up for market losses may not sound all that appealing. And finally, the need to take risk is directly linked to how much money you plan on spending relative to how much you’ve saved.
Before digging into what ETFs you might consider owning to make sure your nest egg passes the test of time, piece of advice No. 1 is: Determine your spending.
There’s a lot of literature on what your withdrawal rate should be, and varying opinions, but many still subscribe to the so-called 4% rule, or “Bengen rule.”
First introduced by financial advisor William Bengen in the early 1990s, the idea is that, in retirement, you can take 4% of your assets in the first year and keep that up, adjusting for inflation every year thereafter, and see your money last at least 30 years.
Mitch Reiner, COO and senior investment advisor at Capital Investment Advisors in Atlanta, recently tested this theory with different asset allocations, and came out a believer, finding 70% of the time that retirement assets lasted at least 50 years, and at its worst, 29 years, if you spend your money at a 4% rate in today’s world.
Income, Income, Income
Once you have that spending rate figured out, the key, he says, is to shift your investment focus from equity returns and portfolio value to income generation. Even in your stock allocation.
“In retirement, you should decouple yourself from performance, S&P 500 returns, and from a focus on the bottom-line value of your portfolio,” Reiner said. “Transition to looking at the consistency of the income being generated in your investment account.”
“Different asset allocations perform differently using the 4% rule,” he explained. “The reality is, the returns associated with equities give you a better chance of success. But if you only need 2% of your entire investment portfolio and you’re super conservative, then you don’t need but 20% in equities. If you need 4%, and you only have 20% in equities, you’re going to challenge yourself. Your withdrawal rate is key in all of these asset allocation conversations.”
Not All Equities Created Equal
Look for an asset allocation rich in income producers, be it stocks, fixed income or even real assets. Reiner’s guide map begins with a good equity allocation in retirement.
“I’d want a 30-50% allocation to equities—that’s kind of a standard I’d tell my parents they should have, even at an older age,” Reiner said. “But you can have that allocation in stocks that look like bonds.”
Think stalwart dividend-paying stocks like Procter & Gamble, Johnson & Johnson and Southern Company,
“Your ride is going to be a lot different than if you had your money in the technology sector, funds like the Technology Select Sector SPDR Fund (XLK). Owning stocks isn’t just owning stocks,” Reiner noted.
A good mix of ETFs for a retiree, according to Reiner, includes funds such as: