Retirement may signal an end to the daily grind of punching a clock, but from a financial planning perspective it also marks the beginning of some heavy lifting.
The decisions you make with your portfolio during the early years of retirement set the stage for whether your savings will be sufficient to maintain a comfortable lifestyle. (Read more: .)
"Those first few years are very important," said Steven Sass, program director for the Center for Retirement Research at Boston College. "Certain options that you have early on evaporate in later years, and there are certainly risks that you have to watch out for during those years as well."
Those risks include investing too aggressively, which subjects you to losses, or too conservatively, which ensures your portfolio will not keep pace with inflation, according to Sam Stovall, chief equity strategist at S&P Capital IQ.
Take note baby boomers. Almost half of the those boomers who are 65 and older had retired by 2011, according to a MetLife Mature Market Institute survey. Of those still working, more than one third said they anticipated retiring within the coming year, when they turned 66 and were eligible for full Social Security benefits.*
Bucket Portfolio Management
To ensure they don't outlive their savings, the newly retired should allocate their portfolios into age-based buckets that generate predictable income, mitigate risk and invest for long-term growth, said Christine Benz, director of personal finance for Chicago-based mutual fund tracker Morningstar.
The first bucket, aimed at covering living expenses for the first one to two years, should be set aside in a liquid accounts, she said, including money market funds, certificates of deposit and high quality short term bond funds, such as the PIMCO Enhanced Short Maturity Strategy ETFÂ Â fund, which is not yet rated by Morningstar.
Ron Palastro, a certified financial planner in Brooklyn, N.Y., is also a proponent of the bucket system, which he said makes it easier to visualize an appropriate allocation.
He suggests a more conservative tack — setting enough money aside on day one of your retirement to cover your living expenses for the first five years. (Read more: .)
If those expenses are $10,000 a month, for example, and you've got $5,000 coming in monthly from pensions, Social Security, or other sources of income, you'll need to set aside $300,000 immediately in cash or cash equivalents. ($5,000 X 12 = $60,000 X 5).
"We take the current market environment out of the equation, and we put that first tier of money in a very conservative account that guarantees liquidity, like short-term money market funds or government Treasurys," said Palastro.
While interest rates on immediate annuities are not attractive at present, Palastro does recommend them "when it makes sense."
Annuities are contracts between you and an insurance company that guarantee periodic payments in return for a lump sum investment or series of smaller payments. Annuity payments can start either immediately, or at a future (deferred) date at the investor's choice.
Whether you opt to convert two or five years of your nest egg into near-term income, you'll help to eliminate sleepless nights spent fretting over
You'll also free the remaining assets in your portfolio to focus on longer-term investment opportunities.
The Intermediate Bucket
To that end, Benz said the second bucket in your portfolio should begin with a source of income that covers your living expenses for up to 10 years. It consists primarily of bonds.
"Given the headwinds that fixed income investments could face over the next decade, it makes sense to look at flexible core bond funds — with the latitude to invest overseas and shorten up their interest rate sensitivity," she said.
Morningstar gives the Harbor Bond fund and the Vanguard Wellesley Income Investor Shares ,its highest five-star rating, but also favors Harbor Real Return Fund.
For income generation during these years, Palastro also recommends a laddered portfolio of certificates of deposit or short term Treasurys that mature in five years, along with
