Retiring Early? Here’s How to Structure Your Portfolio for Success
As you approach retirement, your investment strategy needs to shift from growth to sustainability. With less time to grow your wealth, you’ll need to make the most of what you have. An early retiree’s portfolio requires stronger returns to offset the additional years of drawing down on it.
The Social Security Factor
When planning your retirement, consider how and when you’ll draw Social Security benefits. You can start collecting full benefits at 67, but taking them earlier will reduce your lifetime benefits. Delaying until 70 will increase your benefits. In this scenario, let’s assume you’ll wait until 67 to collect $1,900 in average retirement benefits.
The Early Retirement Conundrum
With several years of drawing income solely from your portfolio, you’ll need to balance your withdrawals. Starting Social Security at 62 can reduce pressure on your portfolio in the short term, but it will also reduce your benefits in the long term. You’ll need to weigh the pros and cons carefully.
Managing Risk in Early Retirement
Early retirees face three core risks: volatility, longevity, and inflation. To mitigate these risks, you’ll need to approach risk management strategically. It’s not about being risk-tolerant, but about being able to absorb and adapt to losses without changing your long-term strategy.
Investment Strategies for Early Retirees
When structuring your investments, consider your income needs, growth targets, and capacity for risk management. A mixed-asset return of 8% over your remaining year before retirement could give you around $960,000 in your 401(k) at age 59.5. From there, you can pursue investment strategies based on your individual circumstances.
Three Representative Portfolio Structures
Here are three possible portfolio structures to consider:
- Average Yield: 5%: An income investment with a 5% annual return, providing a relatively stable income stream.
- Average Return: 8%: A balanced portfolio with a mix of bonds and equities, offering a balance of risk management and growth.
- Average Return: 11%: An aggressive portfolio with a focus on growth, but also higher volatility.
Seeking Professional Guidance
Structuring your portfolio in retirement requires careful planning, especially for early retirees. Consider seeking guidance from a professional financial advisor to ensure you don’t miss vital elements of your retirement planning.
Additional Tips for Early Retirees
- Keep an emergency fund on hand to cover unexpected expenses.
- Consider working with a financial advisor to navigate the complexities of retirement planning.
- Review and adjust your investment strategy regularly to ensure it remains aligned with your goals.
By taking a thoughtful and strategic approach to structuring your portfolio, you can set yourself up for success in early retirement.
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