What should our portfolio distribution be if my wife and I are becoming more risk averse?
My wife and I are both planning to retire December 31, 2021. She will be 70.5 years old, I will be 73 years old. We currently have just over $1,000,000 in combined retirement accounts-heavily weighted in stock mutual funds. What should our portfolio distribution be? We are becoming more averse to risk.
Regarding the distribution you and your wife take from your portfolio, the 4% rule states that retirees with a diversified portfolio split between stocks and bonds can safely withdraw 4% of their initial balance at retirement, adjusting the dollar amount for inflation each year after that.
Regarding the asset allocation in your portfolio, if you want to reduce risk, then increase the proportion of high-grade bonds relative to stocks. Before you make any changes though, I'd advise you to assess your risk tolerance by taking the award-winning online FinaMetrica Risk Tolerance Test.
Your retirement date seemed to be set, thus you only have two more years before the big day. Have you heard the “sequence of returns risk?” Essentially, the portfolio may not sustain your retirement goals if you have a back-to-back negative return at the onset of your retirement. To prevent that, you need to be defensive before the retirement (or in the next two years); hence, have a more conservative portfolio. Once you’re retired, gradually add more stocks back into the portfolio for growth and hedging inflations.
If you have always been a DIY investor, it pays, this time, to consult with a financial planner to get the strategy right. Then, continue to manage on your own, or partner up with the planner for safer retirement withdrawals, social security and Medicare planning. Best!
The first thing you should do is reduce the risk within the account's and lower your stock exposure. In today's interest rate environment a diversified portfolio that is 30 to 40% stock and the rest diversified bonds should yield somewhere around 3%. So if you want to be safe you should just take out the interest and dividends. You are also at the required minimum distribution age so you will need to take out more than that 3% as time goes on due to IRS rules.
This is very hard to give advice based on this limited information. "Risk Averse" means one thing to one person and something else to the (commonly spouses have different views on this as well). That being said, I think it's important for you to determine your willingness to take risk and your overall goals; and based on those things implement a plan that gives you the greatest probability of success. In addition to getting your retirement funds inline with your willingness to take risk and designed to acheive the rate of return needed to meet your goals; it is important to look at other factors that can derail your plan such as a recession/bear market in stocks, long-term care event, etc. I would suggest you contact a Certified Financial Planner (CFP) professional and ask for a complimentary review of your situation. You can find a CFP near you by visiting http://www.letsmakeaplan.org/.
You pose a very interesting question however, it is uncertain if that is the correct question. If you are becoming more risk averse, it is not so much what your distribution should be but what asset allocation will provide you with the money you need with the least amount of risk. It is always advisable to work with a Certified Financial Planner who can help you plan for your future as well as help you understand the best allocation for your investments while providing you with some guidelines for distributions. Historically, 4% has been a safe withdrawal number but given lower expected perfomance of stocks in the future, some planners are now saying 2.5-3% maximum withdrawal limits to optimize longevity. Working with a professional will help you understand best what your goals, risk profile, and time horizon parameters look like.