How much money should you have in stocks at retirement? Responding to a question asked by an attendee at an Oxford Club Private Wealth Seminar, Alexander Green, the Chief Investment Strategist at the Oxford Club, noted that this is dependent on various factors including your age, health status, size of your portfolio as well as your monthly overhead.
Now more than ever, Americans are living longer and people retiring at 65 years could live up to three decades after retirement. As such, you would require equities that generate returns that exceed the rate of inflation within a period of 20 to 30 years.
While building your investment portfolio when young offers many buying opportunities, it bears the risk of having too much money in stocks at retirement. On the other hand, depending on investments to supplement other monthly sources of income will offer a small portfolio when the market rebounds.
Retirement rebalancing is recommended to avoid this risk. It entails having the amount of money you require in low-risk bonds and cash to cater for your monthly overhead costs as opposed to concentrating on the percentage of your portfolio in the stocks.
To achieve this, set aside five years’ worth of living expenses to cover the deficit between your pension and monthly overhead. This is necessitated by the fact that average time taken from the beginning to the recovery of a bear market is between three and a half years to five years.
When the stock market is at new highs, retirement rebalancing requires liquidating stocks to pay the expenses. On the other hand, during a bear market, expenses can be paid from the five-year reserve as opposed to cashing in the stock at low prices.
In case you do not have a portfolio large enough to set aside the reserve, you can opt to work more, save more, reduce living expenses, settle for three or four-year reserves or invest at higher return rates.
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