Volatility Proofing Your Portfolio In Retirement

iShares International Select Dividend (IDV, yield around 5%). This low-fee fund gets you 100 holdings that skew more toward developed markets than emerging ones, with only a very small portion in the U.S.

Here's a simple back-of-the-envelope before-and-after. Say you have a $1,000,000 portfolio of stocks at retirement, and you're planning on needing around $50,000 a year to live on. You'll be drawing down 5% the first year, and somewhere close to that in the years immediately following. That percentage could ramp up over time, depending a lot on what the stock market does.

If that portfolio gets cut down to $750,000 due to a bear market, you're suddenly looking at a nearly 7% draw-down rate right out of the gate, assuming no change to your living expenses. Your portfolio will likely be depleted about 25% faster than before.

But what if you could get a 4% dividend (and/or distribution) yield on that initial million-dollar portfolio? That would get you $40,000 without touching the principal. Taking the remaining $10,000 by selling some securities will be a lot less painful in a down market than taking $50,000. If the portfolio did get cut down in value by a bear market, those dividends would likely still keep coming.

2. Diversify, but don't worsify. The funds above are great for exposure to stocks. Do you need to be in other assets too?

Probably--especially as retirement nears. We're thinking of fixed income (bonds) here. How much of your portfolio should be in bonds will depend on your risk tolerance more than anything else.

Most individual investors--even those who buy individual stocks--won't want to invest in individual bonds. So, as with stock funds, what you're mainly looking for in a bond fund is low fees. If you are hoping to just purchase a single bond fund, you'll also want to make sure it is well diversified by credit quality, issuer, and duration.





As usual, it's Vanguard to the rescue here. Vanguard Total Bond Market ETF (ticker BND) is a great place to start for any budding bond investor. Its .05% expense ratio is about as low as it gets, and while it might skew conservative (toward Treasury bonds) for some tastes, it's tough to beat in its category. On the more aggressive side, iShares iBoxx $ High Yield Corporate Bond ETF (ticker HYG) could be a good option for boosting your fixed-income yields, though with a fair amount more risk than BND. BND currently yields around 3%; HYG's is more than 5%.

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What would happen to your retirement plans if you changed up your asset allocation? WealthTrace can help you find out.

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