How to Avoid Tanking Your Portfolio in Retirement

Rebecca Lake


Making your money go further in retirement is a challenge that many Americans may be unprepared for.

According to most recent RICP Retirement Income Literacy Survey from The American College of Financial Services, 82 percent of Americans have unrealistic expectations about the need for long-term care later in life. Less than half of those polled understood that a life annuity can protect their assets against life expectancy risk.

When it comes to managing your portfolio in retirement, what you're doing wrong is just as important as what you're doing right. Recognizing what behaviors could be counterproductive to your goals is an important step in making the most of your investments during your later years.

How you withdraw assets counts. Having investments in both qualified and taxable accounts can work to your advantage, but the order in which you tap these assets is critical, says Kyle Whipple, a financial advisor at C. Curtis Financial in Plymouth, Michigan.

"Most retirees will wait to withdraw funds from their individual retirement account until they absolutely have to at age 70 1/2 because they don't want to pay taxes on those funds," Whipple says. "Instead, they'll draw from their nonqualified funds because they like that it doesn't add to their taxable income."

[See: 7 Tips for Finding the Best Target-Date Retirement Funds to Buy.]

Whipple says that if a 60-year-old has $500,000 in an IRA, it's feasible that the account could increase in value to $1 million by the time the person reaches 70 1/2. The required minimum distribution on that amount would be around $36,500. Whipple says the distribution, along with Social Security benefits, pension payments or other income could push him or her into a higher tax bracket.

Rather than delaying withdrawals from a traditional IRA, you may reap more benefits by withdrawing those assets earlier in retirement. Incorporating withdrawals from Roth accounts or taxable investments could also be helpful if minimizing your tax bill is a priority.

Be realistic about your liquidity needs. If you're no longer working, you'll need cash in retirement to cover your day-to-day expenses, but timing is important when liquidating assets.

"Converting assets to cash at the wrong time can be very costly," Whipple says. "Unfortunately, many investors make a highly emotional decision to convert assets to cash when the market is down and make an emotional decision to get back in when the market is up."

Pedro Silva, a financial advisor with Provo Financial Services in Shrewsbury, Massachusetts, says that just because an investor has been focused on low-cost, liquid investments while accumulating assets, it doesn't mean those are appropriate instruments for distributing that money.

"Not being open to the possibilities of annuities, structured certificates of deposit or alternative investments can leave you with a portfolio that's overly reliant on equity returns for retirement income," Silva says. "Clients typically don't need 100 percent of their portfolio to be liquid, since they're not looking to spend 100 percent of their money in any one-year period."

Whipple encourages a holistic approach when determining how much of your assets to liquidate.

"How much a retiree should keep in cash depends on their personal situation, comfort level, investment strategy, cash flow and risk tolerance," Whipple says.

He advises reviewing your spending for the last few years and examining what your biggest emergency expenses were, then using those numbers as a guideline for establishing your cash cushion.

Remember to rebalance. Rebalancing isn't something you can stop doing just because you've retired, says Yelisey Kuts, an investment advisor representative with Haven Financial Group in Burnsville, Minnesota.

"As we approach retirement, rebalancing a portfolio becomes even more important," Kuts says. "It's time to shift our focus from accumulation to preservation and for many retirees, this shift simply involves getting out of stocks and into bonds."

[See: 20 Awesome Dividend Stocks for Guaranteed Income.]

Kuts reminds investors that the rebalancing process happens over time, and it's something to be thinking about before you retire.

"Failing to rebalance portfolios in retirement or near retirement can be devastating, particularly if a retiree is overweighted in a specific stock," Kuts says.

Patrick Stark, director of financial planning at RS Crum in Newport Beach, California, says retirees must tread the line carefully when rebalancing.

"An overly aggressive stock allocation during retirement will decimate a portfolio during market downturns," Stark says. "While younger investors have the runway to ride out significant market volatility, the ability to recover from market crashes decreases as we get older."

At the same time, you don't want to be too conservative with your investments too soon.

"There's nothing wrong with sitting in cash if you have a large pension and/or significant assets that dwarf your annual spending, but most of us need to generate some level of investment return to ensure that we're not going to run out of money in retirement," Stark says. "Keeping [the bulk of] your portfolio in ultra-safe investments, such as bank accounts or CDs, isn't going to keep up with inflation in the long run."

Be mindful of how you allow the market to influence decision-making. If you're already in retirement, you have less time to recover from market downturns but you can't afford to panic if stocks begin to slip.

"Abandoning your investment strategy in response to the ups and downs in the market is a surefire way to tank your portfolio," says Eric Meermann, a certified financial planner and vice president of Palisades Hudson Financial Group in Stamford, Connecticut.

Meermann says diversification is a key factor in ensuring your portfolio is equipped to deflect any curveballs the market may present in retirement. That means having a long-term investment plan that includes a mix of different asset classes and maintaining your asset allocation over time.

"If you're adhering to a 60-percent-stocks, 40-percent-fixed-income strategy, for example, the actual percentages of your wealth in those asset classes may materially differ from those target percentages," Meermann says. "If the market goes up substantially, it may mean your portfolio is overexposed to risky stock assets and you should sell equities to purchase fixed income to bring it back in line."

Kuts says that if you're concerned about making any missteps with your portfolio in retirement, it's best not to go it alone.

[See: 10 Questions to Ask Before You Hire a Financial Advisor.]

"There are so many pieces to the retirement puzzle that it can be overwhelming," Kuts says. "Sometimes, it helps to think of retirement in terms of putting together a winning team. Partnering with the right financial advisor, insurance agent, elder law attorney or retirement planner might be the most important decision you make in retirement."

Rebecca Lake is a freelance Investing & Retirement reporter at U.S. News & World Report. She's been reporting on personal finance, investing and small business for nearly a decade and her work has been featured on The Huffington Post, Business Insider, CBS News and Investopedia. You can connect with her on LinkedIn and Twitter or email her at rlake0836@gmail.com.