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When you’re early in your career and just starting to build wealth, the do-it-yourself approach to portfolio management is enough to start your nest egg.
By the time you’re approaching your 50s, however, investing isn’t one-size-fits-all. Retirement is on the horizon and staying on track with your investment goals is essential.
At a high level, portfolio management is important in your 50s because retirement could last thirty years or more. That means you'll want to employ every strategy possible aimed at helping you get ready. Unfortunately, investment strategies and tactics differ for everyone and its easy for small investment mistakes to snowball into big ones. That's why guidance from an expert can help.
Here are seven powerful reasons why portfolio management is important in your 50s.
1. Financial goals change over time
When you begin investing for retirement, you have a very hazy idea of what retirement might look like. Your goal is simply to put aside as much as you can while funding your other priorities like saving for a home or college education for your children.
When you’re in your 50s, however, your vision of retirement is beginning to take shape. You’re deciding what age to retire, where to live, and how you plan to spend your time—in other words, your income needs are becoming more concrete.
But, life throws curve balls all the time and goals frequently change.
Example: John is 50 years old and wants to retire at age 65. But, after a couple of years, he get's burned out by his job and decides he wants to retire at 60. This creates a big challenge for John. He must now make his retirement savings last an additional five years plus he must figure out how to pay for healthcare insurance from age 60 to 65, at which point he can apply for medicare. If he get's portfolio management help now, he can implement strategies to help him achieve his objective.
Getting professional investment advice in your 50s can help you be better prepared for life in your 60s and beyond. You want to make sure your assets and investments are fully aligned with your personal goals. Getting advice too late could cost you thousands.
But, there are a lot more reasons why portfolio management in your 50s is so important.
2. Determine the right mix of stocks and bonds
Asset allocation plays a huge role in your portfolio returns. According to one study, over 90% of the variance of returns in a portfolio is directly related to the mix if investments you own.
If you get your asset allocation right, you stand a much better chance of being where you need to be when you’re ready to retire.
When you’re younger, a more aggressive investment portfolio can make sense—your risk tolerance is higher because time is on your side.
In your 50s, professional portfolio management becomes more important. You'll want to make sure that your investments match the shortened time frame to when you’ll need your money for retirement. Your strategy needs to change from focusing on growth to focusing on preserving wealth, creating multiple sources of income for retirement, and reducing taxes during your highest earning years.
Questions you'll want to answer to build the right asset allocation include:
How much return do I need on my money?
Do I own investments that may be unsuitable for my individual or family situation?
Am I taking too much risk?
Should I own index funds, stocks, or mutual funds?
A portfolio manager can help align your mix of bonds vs stocks vs mutual funds with specific goals such as generating income, preserving your wealth, and minimize taxes.
3. Properly diversify your portfolio
Everyone knows that diversification is important. The problem is that most people aren't properly diversified.
Example: Mary has saved $1,300,000 for retirement. She thought she was diversified because she owned thirty seven stocks and four mutual funds. Upon further inspection, Mary learns that her mutual funds actually own the same stock - a company called Lehman Brothers. When the stock market crashed, Mary is devastated because Lehman Brothers flies for bankruptcy and never recovers.
Portfolio risk can be divided into two types: Systematic and unsystematic. Systematic risk is defined as risk related to the financial markets as a whole—market volatility, inflation and rising interest rates, for example. Unsystematic risk cannot be diversified away.
Unsystematic risk is limited to a particular sector like technology or an individual stock.
Generally speaking, a well-structured investment portfolio should diversify away unsystematic risk. This means that if a single stock that you own goes bankrupt, the impact to your portfolio will be minor because you have a very small percentage of your money invested in an single security.
Portfolio management in your 50s is important because you need diversification more than ever. While diversification can't guarantee against a loss, it can help reduce your risk and give you time to recover if one of your investments tanks.
Professional portfolio management can help you properly diversify.
4. Fine-tune your tax reduction strategy
When you retire, you will likely draw income from several sources: Social Security, pensions, distributions from IRAs and 401(k)s, personal savings and investments, and perhaps even rental properties.
Each source of income may be taxed differently. Your retirement planning should ensure each source of income works together as efficiently as possible to minimize your tax liability—both now and after you retire.
Reducing your tax liability is one of the major reasons portfolio management in your 50s is so important. You'll want to make sure that you create different buckets of income as early as possible.
Example: Michael is 52 years old and has saved $1,124,000 in his 401 (k). Michael is disappointed when he learns that every dollar he withdrawals from his 401 (k) in retirement will be taxed at the highest federal tax rate for his income level. Michael hires a portfolio manager to help him build out a strategy so he can enjoy tax free income and tax-advantaged income upon retirement. Having greater control over his income taxes in retirement will help Michael make his money last longer.
A portfolio manager helps you choose the right retirement accounts and investments to lower your taxes before you retire and keep them low when you’re drawing down assets in retirement. That may mean properly allocating your investments to reduce taxes, contributing to both a Roth and a traditional IRA, creating a mega backdoor Roth IRA, buying tax-exempt bonds, or making catch-up contributions to your IRAs and health savings account.
5. Rebalance to maximize returns and minimize risk
You invest for specific goals—starting a new business, educating your children, ensuring income for retirement—and your asset allocation strategy reflects those goals. The problem is that the market is always changing; some investments outperform and others underperform. Over time, that imbalance can really mess up your asset allocation.
Take the last 10 years for example: The S&P 500 is up nearly 200%. If your asset allocation strategy was 50% stocks, 45% bond funds, and 5% cash in January 2010, your portfolio mix wouldn’t look anything like that in January 2020.
As you can see, there’s significantly more money tied up in stocks in 2020, which is a level of risk you may not be comfortable with if you’re close to retirement. A 10% drop in the stock market would affect nearly 75% of your portfolio.
Rebalancing is the process of selling off some assets and purchasing others to keep your portfolio aligned with your allocation strategy. This should be done on an annual basis at a minimum.
In tax-deferred accounts such as IRAs and 401(k)s, you don’t have to worry about capital gains on any assets you sell, but that’s not the case in your individual investment accounts. A financial advisor for retirement can use techniques such as tax-loss harvesting during rebalancing to minimize your exposure to capital gains tax.
6. Ensure liquidity when you need it
Diversification can hedge your risks, but it can’t eliminate it entirely. When there is a lot of volatility in the market, as we have seen lately, you need to have assets in your portfolio to provide income when you need it without selling off the stocks and funds you’re counting on for growth to protect your nest egg against inflation.
Working with a portfolio manager in your 50s is a way to ensure you have liquidity—a source of income for your immediate needs in retirement—without sacrificing growth. This might include mixing short- and long-term bonds with cash assets such as staggered CDs and money market funds to provide liquidity and safeguard your capital during a potential market correction.
DIY or professional portfolio manager?
Your 50s are a pivotal time for retirement planning. Your income plateaus at the same time as your long-term needs are coming into near-term focus. It’s your last chance to re-examine your strategy, refocus your plan, and make a course correction if you need to.
If you’ve spent your life investing on autopilot—making your maximum contributions to tax-deferred accounts—working with a portfolio manager in your 50s might seem like an unnecessary expense. But that may be a short-sighted view.
Over the next five to 10 years, you need to optimize your portfolio to make sure it works for you the day you enter retirement. That means investing in the right mix of assets to capture growth while protecting against market downturns. It means putting your retirement savings in the context of your complete financial picture so all the pieces work together efficiently to maximize your income and minimize your taxes. It’s something you can’t afford to leave on autopilot.
Covenant Wealth Advisors is one of the area’s only independent advisory firms specifically focused on investing for retirement; we’re not affiliated with a particular financial product. Our independence lets us choose the investments we believe are best aligned with your goals and values.
We’re fee-only Certified Financial Planners; our fees are transparent so you know exactly what you’re getting and how much you’ll pay—no hidden costs or unpleasant surprises. We don’t take a percentage of your portfolio off the top for management fees.
If you’re in your 50s and want to be sure you’re on the right track for retirement, schedule a consultation to learn more about our retirement planning and portfolio management services.
Mark Fonville, CFP®
Mark has over 18 years of experience helping individuals and families invest and plan for retirement. He is a CERTIFIED FINANCIAL PLANNER™ and President of Covenant Wealth Advisors.
Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.
Registration of an investment advisor does not imply a certain level of skill or training.