While preparing for retirement is a key component in financial planning, many find themselves approaching retirement age lacking the necessary skills required to put a plan in place. Fortunately, it’s never too late to prepare for retirement, even if you’re over 60.
Diversifying your portfolio is one of the most important elements of long-term investing. This not only means having a portfolio with stocks, bonds, and other investments but also diversifying within each of those assets. Diversifying your portfolio with both hedge against loss and boost performance.
In addition, investors should also avoid having more than 3% of their portfolio in any one stock and invest across a variety of industries.
While important for any investors, diversifying your portfolio is crucial for investors 60 and older. While younger investors can tolerate higher risk, those closer to retirement age should focus on mitigating risk and gaining consistent yield.
Know Your Standard Deviation
Investors often use their return on investment to calculate if their portfolios are performing as expected. But Lampe notes that investors should instead really know their portfolio’s standard deviation, which represents the portfolio’s risk and how consistent its returns have been over time.
A low standard deviation shows greater price consistency than a high one. For context, the relatively low-risk S&P 500 has a 10-year standard deviation of 13.56%, so if you can handle this investment losing 13.56% at any given time, you can safely invest in this sector.
A financial adviser can help you calculate your portfolio’s standard deviation and provide you with a forecast of potential ways to achieve a lower standard deviation with the same return. You can also calculate your standard deviation via such sites as Yahoo! Finance, Seeking Alpha, and Morningstar.
Be Mindful of Inflation
Although investors are unable to control inflation, there are ways to mitigate it. The big concern is that when inflation is high, it will overtake investment gains. While inflation may be resolved within the foreseeable future, investors in their 60s have less time to recover from their losses and need to be aware of how inflation may affect their retirement investments in the short term.
Older investors should avoid investing in many long-term bonds, which are most susceptible to inflation. Plus, it’s important to identify investments with pricing power (i.e., they can change their prices quickly), which helps naturally protect their value from inflation. Short-term bonds and investments with high pricing power are two ways to protect your investments from inflation.
Focus on High-Yield
Suppose you’re building your retirement portfolio in your 60s. In that case, you must focus on high-yield performers like real estate investment trusts, covered calls, and alternate investments to maximize your portfolio close to retirement. These will allow you to grow your investments more rapidly as you approach retirement age.
Likewise, you should be focusing on investments that have a moderate dividend yield, which can potentially allow you to live off dividend income and leave the bulk of your investments in the market.
A standard tool for many retirees is the annuity, which guarantees a regular income stream for a certain number of years. While this seems like a simple solution, investing in annuities can be complex. Some come with high commissions and fees, and investors need to be aware of the underlying costs and stipulations that can alter your investment contracts at any point.
Another thing to consider when investing in annuities is that the return may be lower than that of stock investments and even lower after all the fees are paid. While not everyone needs to steer clear of annuities altogether, avoiding them may be a safer option for new investors closing in on retirement age.
Know Your Habits, Embrace Technology
Once your investments are all nailed down, it’s time to focus on saving and budgeting. When planning for your retirement, the first thing to be aware of is how much you’re spending now and how much you will need to spend during retirement. Consider an emergency fund, eliminating debt, evaluating recurring costs, such as health insurance, and understanding your taxes to ensure you’re not left unprepared.
Fortunately, there are many resources and online tools available to help with this, like AARP’s retirement calculator, for example.
“When retirement arrives, you don’t want to be left concerned about how you’ll finance the remainder of your life,” Lampe writes. “Maintaining a consistent focus on planning before and during retirement will help you be prepared. More importantly, taking advantage of the time you must prepare now is the best tactic you can use to ensure an enjoyable, financially secure retirement future.”
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