MOST INVESTORS KNOW it's wise to spread their money between stocks, bonds and various subcategories. But those in or near retirement may give special attention to organizing income-producing assets like dividend-paying stocks, interest-earning bonds and certain funds designed for big yields.
Why Diversification Is Important
So, what are the factors that go into setting up the income-producing part of the portfolio?
Bruce Elfenbein, an advisor with SecuRetirement in Hollywood, Florida, has a rule of thumb for retirement investing: “How much money can you afford to lose before it will negatively affect your quality of life in retirement? If you double that number, that's a benchmark for the amount of money you can afford to have at risk.”
That way a 50% drop in the market will leave enough to keep up the lifestyle.
As any advisor will say up front, everyone's situation is different. But most retirees share a need to get the most income possible without taking on too much risk.
After all, retirees requiring a given income can be in a very tight spot if they continue taking the same amount after assets have lost value. A portfolio that loses 20% of its value in a market plunge must grow by 25% to get back to where it was, and one that loses 50% must grow by 100%. Reducing the balance by taking more out after a drop just makes matters worse.