There are common risks to your retirement that you have probably considered and factored into your planning, such as inflation, longevity, and health care. But a lesser-known threat that is just as important is that of liquidity.
Liquidity risk is the inability to have assets available to financially support unanticipated cash flow needs. It means having the majority of your assets not able to be sold quickly to support an emergency situation. There are three investment scenarios involving liquidity, returns, and risk that you need to factor in when planning for retirement.
Risk, Liquidity, and Returns
If your goal is to have a bulk of your assets available to cash out at any time, but you also desire low risk, you’re unfortunately going to have a low return. This type of asset is going to look like a basic savings account.
On the other hand, if you want lower risk but also slightly higher return, you’ll need to sacrifice liquidity. You could invest in something like real estate that will require time and paperwork to sell.
Finally, if your priorities are high liquidity plus high return, your risk is going to increase. This type of investment will be in the arena of stocks.
What type of investment will work for your retirement? How much risk, liquidity and return are you wanting in your portfolio?
Diversification is Key
At first look, you may think that lots of liquidity feels safer and be drawn to investing in assets that are of high liquidity. But remember, you also want to ensure that you have enough income to last your retirement, and high liquidity is a risk in that regard.
The key is to achieve a balance within your portfolio. You will want to have both long-term and short-term investments. Your short-term investments will play the role of being easily liquidated, while the long-term ones can grow to provide for your retirement.
You have plenty of options to achieve this balance. Some assets are not easily sold quickly, at least not without loss, such as real estate and business interests. Some life annuities offer a limited ability to liquidate, and deferred annuities provide liquidity, but with charges that will decrease the value. For other investments, choose differing maturity dates to give yourself some breathing room.
Plan Ahead for Liquidity
When creating or evaluating your portfolio in light of your retirement goals, plan for having sufficient liquidity. Retirement often brings surprise expenses, and you will require the ability to sell off some of your investments to provide for these costs.
Beyond diversifying, consider what assets are available if liquidity is needed. Create a cash reserve, but also research your options when it comes to borrowing from a life insurance contract, a home equity line of credit, or reverse mortgage line of credit.
Take Systematic Withdrawals
Another strategy that will provide for liquidity is taking systematic withdrawals from a diversified portfolio. With this method, you aren’t merely liquidating your assets when you need the money, but living off the income of your investments while still allowing the principal to grow.
Systematic withdrawals also provide for flexibility. You will be able to change strategies as laws change, investment conditions alter, and life situations occur.
More than anything else, remember that you need to create a portfolio based on what you need. As you aim for retirement, make sure that your goals, concerns, and plans line up with your investments so that you can rest at ease that you will be taken care of in the latter years of your life.
To learn more, download our free checklist, 12 Steps To A Successful Retirement today. If you need help, call my office at 770.249.7424 or email me today at firstname.lastname@example.org.
You May Enjoy These Articles As Well...
001 - The New Retirement: Preparing For Version 2.0 Of You
Podcast: Play in new window | Download Subscribe: Android | RSS The New Retirement: Preparing For Version 2.0 Of You Welcome to The Retirement ...read more
Market Risk Is Real: There Are Ways To Protect Your Nest Egg and Counter Volatility
Market risk is real, very real. The recent market drop can be unnerving for anyone—especially ...read more