What Does It Take To Build a Recession Proof Retirement Portfolio?
How can my portfolio and my retirement survive a recession? This is a very common fear for retirees and pre-retirees and considering the movement of the market recently, you may have had this same question yourself.
Throughout your working life, you have set dollars aside to grow your assets to prepare for the time when you no longer receive a paycheck. As hard as it can be to ride out stock market drops during working years, it can be even more difficult to stay on course when a critical portion of your day-to-day livelihood relies on the performance of your investments.Thankfully, there are strategies you can implement in your portfolio to lessen the impact of a down market and solidify your retirement outlook even in the most volatile of markets.
When our advisors are creating a portfolio for an individual or couple preparing for retirement, it is important to know the answers to these questions so we will know what your retirement portfolio will look like:
1) Are there any major expenses in the next 3-6 years?
2) How much do you want to be able to withdraw from your portfolio each year in retirement?
3) How flexible are you on the amount you pull out of the portfolio each year?
Once we know the answers to these questions, we can start to position your portfolio in a manner that lowers risk on some dollars while possibly even increasing risk on others.
The Three Bucket Approach
When a retiree views their portfolio, it is common to view it as one single entity that moves together, but you will not be withdrawing 100% of your portfolio in the first year, the first 5 years, or even the first 20 years.
Some of the dollars will be used very soon while others have years or possibly decades to continue to grow. So rather than viewing the portfolio as one bucket, it's important to understand that different portions require different approaches.
Since World War II, the average recession has lasted 11.1 months. That's less than one year. Is a a 1-year recession going to have a huge impact on dollars that you will not use for 15 or 20 years? Most likely not. Therefore, we have the opportunity to be more aggressive with dollars that are not needed right away.
The dollars that will be needed in the short term are much more at risk of a market downturn. In practice, we try to segment portfolio withdrawals into 3 buckets: funds needed in the next 3 years, funds needed 4-6 years from now, and funds not needed for 7+ years.
1) 0-3 Year Bucket: This bucket should be invested conservatively. There are many tools to choose from, but this bucket should not be subject to the same risk and volatility of the overall stock market. That way, if the stock market goes through a typical 11.1-month recession, you know you have 3 years of withdrawals safe and accessible.
2) 4-6 Year Bucket: This bucket should have a moderate level of risk because we now have a longer time frame to absorb a larger drop if one were to occur.
3) 7+ Bucket: This bucket should be the driver of growth in the portfolio because we know it can weather the stock market drops should they occur. This higher risk, higher growth bucket will be the portion that sustains the balance of your portfolio over time.
Living off your retirement portfolio can be a scary proposition after years of receiving constant paychecks.
No one can predict exactly what will happen in the stock market or economy. That is why the strategies that we have developed at CWA are designed to put you in the best position possible to realize a successful retirement no matter what the market brings.
Sincerely,
Andy
Andy Anderson, CFP®
https://www.kiplinger.com/slideshow/investing/t038-s001-recessions-10-facts-you-must-know/index.html
