For retiree Carol Klonowski, portfolio management became a 20-hour-a-week job. After taking classes offered by her brokerage firm, Charles Schwab, she started making regular stock trades from her computer, and reading up on analyses by financial advisers. She joked to friends that she was managing a small—very small—hedge fund.
Klonowski's strategy of managing her own investments is unusual among retirees. Many of her peers turn their money over to professionals or stick with funds designed to automatically become more conservative as they age. But advisers say such tools can give retirees and soon-to-be retirees a false sense of security, and that successful investors are usually more involved in the decision-making process. Here's what investment advisers recommend instead:
Get regular check-ups. "In the '80s and '90s, when people retired, they'd get an asset allocation developed and then forget about it because everything did so well," says Dean Barber, president of Barber Financial Group in Lenexa, Kan. But if people don't regularly rebalance their portfolios, they're at risk for being too heavily weighted in stocks or bonds, he says. If investors have too much money in stocks, they can lose a lot when the market drops. If too much is in bonds, they might not be able to keep up with inflation. Retirees are particularly likely to fall out of balance because they're no longer adding money to their accounts, Barber says. That's why he recommends reviewing retirement investments at least three times a year.
Know what you need. Retirees who want to become more involved in managing their portfolios should first decide how much money they will need to take out of their investments, advises Tim Courtney, chief investment officer of Burns Advisory Group in Oklahoma City. For example, someone with $1 million in his or her portfolio might plan to withdraw 5 percent a year, or $50,000. (Most people wouldn't want to withdraw a higher percentage than that, he says, because it doesn't leave much wiggle room for dips in the market.)
With a 5 percent withdrawal rate, investors will need to put at least some of their money in stocks, because bonds—while safer—provide lower returns. On the other hand, a retiree who needs to withdraw only 2 percent of his portfolio, perhaps because he also receives income from a pension, can rely more heavily on safer bonds and certificates of deposit. "The withdrawal rate you require will tell you how much risk you need to take," says Courtney. Over time, he says, people usually increase the value of their withdrawals to keep pace with inflation.
Seek stability. Even retirees who actively manage their investments will want the bulk of their portfolio in a diverse set of investments that doesn't require much daily monitoring. "You should be setting up your portfolio in a way so you're not making constant changes," says Courtney. Adjustments and rebalancing, yes, but frequent stock and fund trades, no. "If you're very active in buying and selling asset classes, the odds are against you being able to time those right to make money [consistently]," he adds.
Courtney recommends that investors establish a core set of investments that will keep their portfolios relatively stable as the economy fluctuates, diversifying through index funds with low management fees and steering clear of more complicated strategies such as funds that bet against, or "short," the market. Then, if investors are drawn to a specific sector of the market or to a particular fund, they can add that to their portfolio without threatening its overall diversification.
Get emergency-ready. Retirees should also plan for emergency cash needs, so if they suddenly have a big expense, they won't have to sell investments. Advisers typically recommend keeping at least three to six months' worth of expenses in a liquid, easily accessible account, such as a savings account or money market fund.
But don't forget to take risks. A recent Charles Schwab survey found that 35 percent of Americans consider protecting retirement assets more important that growing them. But Klonowski, the retired computer systems analyst, says her comfort with some level of risk is what allowed her portfolio to bounce back after the recession. "Everyone was trying to get to a safe place for money," she says. "I got a little lucky by taking on a little more risk than was comfortable." That kind of nerve might come more easily if you're at the controls.