by Chris Bixby, CFP®, EA
Senior Vice President
Portfolio and Wealth Management
Retirement represents the achievement of financial stability and being able to choose whether or not to work, a goal many of us share. But what does retirement really mean from a financial standpoint?
Clients often approach us with a desire to target a specific rate of return in their portfolio. An important question to consider is, “What does that rate of return get you?” The rate of return is only meaningful if it helps you achieve your goals. If the return is higher than necessary, you may be taking on excessive risk. Even worse, if it’s too low, it may fall short of funding your lifestyle aspirations.
At the heart of retirement planning is establishing personalized goals that reflect your desired lifestyle. These typically include essential expenses (utilities, groceries, etc.), medical costs, travel plans, home improvements, vehicle purchases, charitable giving and more. The more personalized these figures are, the more effective your planning will be. This allows the critical question of having enough to retire with confidence to be answered with greater clarity. More importantly, these goals directly influence how your portfolio should be allocated.
Your portfolio should align with your goals. If you require significant monthly income to cover expenses, a higher allocation to income-producing investments, such as dividends and interest, may be appropriate. If many of your expenses are discretionary, you may need less income and can potentially aim for higher long-term returns. Planning for large expenses in the near future may call for a dedicated allocation to bonds or other stable assets to preserve capital for those needs.
In retirement, both short-term and long-term needs must be met, and each requires a different allocation. Expenses due in the next few years should be funded through more stable investments, while longer-term needs can be supported by investments with higher growth potential. Historically, equities have delivered strong returns over longer time horizons, making them well-suited for future spending needs. The balance between short-term and long-term goals influences the appropriate allocation needed to meet those goals.
Understanding your goals and how they influence the timing of your portfolio withdrawals helps your portfolio manager determine the right balance of bonds and equities for your unique situation. This allocation sets the foundation for your portfolio’s expected return; one that is aligned with achieving your personal financial goals.
Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.