Q: How do I keep my IRA stable after retirement?
A: Certainly, retirement is an appropriate time to re-evaluate your IRA. In many cases, retirement is something of a tipping point at which you go from putting money into the plan to drawing money out of it. In general, a switch from positive to negative cash flow means a portfolio should downshift to a less aggressive investment strategy.
How much less aggressive is an open question. Total stability may not be the appropriate goal, especially at a time when savings accounts and other safe options are yielding next to nothing. So, instead of thinking in terms of absolutes such as a choice between fully invested and completely stable, think of your portfolio as sliding along a scale between the two.
Upon retirement, it may well be appropriate to slide toward the stability end of the scale. Just how far you go depends on the following considerations:
- Withdrawals amplify volatility. It is always tough to make up ground when you lose money, but it is especially tough when you are withdrawing money. If you lose 20 percent, it takes a 25 percent gain to break even. However, if you lose 20 percent and withdraw 5 percent, it takes a 33 percent gain to break even. That's why some reduction in volatility may be appropriate once you start drawing from your IRA.
- Inflation is still a factor. With rates on savings accounts near zero, inflation will steadily eat into the value of your savings unless you have some growth component to your portfolio. Short-term deposit rates have not beaten inflation since 2009, and have done so in only three of the past 10 years.
- The role of other resources is key. If you have income from Social Security, part-time employment or other savings, it would reduce the extent to which you need to draw on your IRA -- and how conservative your IRA investments need to be.
- Required minimum distributions need not affect your investment strategy. If tax requirements force you to draw more money out of your IRA than you need to spend, you can always make those withdrawals via in-kind transfers of securities, and set up an after-tax portfolio with a similar investment strategy.
To a large extent, risk is always present in one form or another -- you just have the option of exchanging one type of risk for another. Stabilizing a portfolio also means increasing the risk that it won't keep up with inflation, so while you may want to trade in some volatility risk for stability upon retirement, you should not go overboard and take on too much inflation risk.
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