How to Build an Efficient Retirement Portfolio at Different Stages of Life
For Young Investors: The Simplicity of Target-Date Funds
According to David Blanchett, head of retirement research at PGIM DC Solutions, young investors should prioritize maximizing return within their risk tolerance. A simple solution is to invest in a target-date fund, which automatically adjusts your asset allocation as you approach retirement.
For Approaching Retirees: The Importance of Professional Guidance
As you near retirement, relying solely on a target-date fund becomes less effective. Blanchett recommends seeking guidance from a financial professional to tailor your investment strategy to your individual needs and risk tolerance.
For Retirees: The Complexity of Building a Diversified Portfolio
In retirement, portfolio construction becomes more intricate. Blanchett emphasizes the importance of diversification to mitigate risks such as inflation, sequence of returns, and longevity. The optimal portfolio for each retiree depends on their unique circumstances and goals.
Understanding the Evolving Risk of Stocks and Bonds
Contrary to common perception, bonds may not always be a reliable diversification asset. Blanchett highlights the concept of randomness in returns and the decreasing risk of stocks relative to bonds over longer time horizons. Even risk-averse investors may benefit from a more aggressive allocation to equities.
Optimizing After-Tax Returns with Tax-Efficient Allocation
Retirees should optimize their after-tax rate of return by allocating tax-inefficient assets (e.g., bonds) to pre-tax accounts and tax-efficient assets (e.g., stocks) to taxable and Roth accounts.
Addressing Longevity Risk
Blanchett identifies longevity as the greatest challenge in retirement planning. He suggests strategies such as delaying Social Security claiming or purchasing a lifetime income annuity to mitigate this risk.
Personalizing Retirement Plans
Blanchett emphasizes the importance of personalizing retirement plans to account for idiosyncratic factors like longevity. He recommends using free online tools to estimate life expectancy and ensure adequate preparation for retirement.