Living in Retirement
The biggest mistake retirees make with their portfolios
April 02, 2014
Colin Kelton: Trisha from Boulder, Colorado, asked a question that I think many people would ask, and it's simply, "What's the biggest mistake people make with spending in retirement?"
Colleen Jaconetti: That's a good question. I would say, including my own mother, one of the biggest mistakes is really letting the yield on the portfolio—so how much income you're receiving—dictate how much you can spend, because what this leads to—obviously we talked about current low yields, 2% to 2.5% on a balanced portfolio—this leads to people making radical changes to their portfolio. So they are going from this broadly diversified low-cost portfolio to suddenly overweighting high-yield corporate bonds, dividend-paying stocks. Obviously, to do this they're probably going to buy these things in a taxable account so they can access this income. So it actually could—and this is one thing I think that—actually I've been trying to stress this with my mother is—nobody wants to spend from principal. They don't want to hear that.
What we would say is two things. One is changing your portfolio to—meaningfully changing your portfolio to overweigh these dividend-paying or high-yield strategies, you could actually put your principal value at higher risk than just spending from it. That would be the first thing.
And the other thing would be, it's less tax-efficient. So you could actually be incurring a lot more taxes by going in this manner. So we would say, instead of changing your portfolio, think about spending from the appreciation on the portfolio. That could look to people as if you're spending from principal, but if you just look at 50% stock, 50% bond portfolio for 2013, 2.5% yield, but there was a 13% capital appreciation.
What we're saying is, tap into that appreciation that you're getting on the portfolio, which for most investors or most retirees, 13% should be more than able to cover the amount of spending they're looking for.
All investing is subject to risk, including the possible loss of the money you invest.
For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
Bonds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.
When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.
© 2014 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.
Your investment strategy is just as important in retirement
The obvious answer would be spending too much, but that's not it. Many investors make radical changes to their portfolio because of market volatility. Colleen Jaconetti from Vanguard's Investment Strategy Group says to stick with your investment plan and spend from capital appreciation if necessary.
Other excerpts from this webcast:
- The 4% rule and a dynamic retirement spending plan
- Tax-savvy withdrawals in retirement
- Required minimum distribution basics
- Annuities and your retirement portfolio
- All investing is subject to risk, including the possible loss of the money you invest.
- For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
- When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
- This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.