A common concern that investors have is being underfunded in retirement, or not having sufficient income from their portfolio to support their lifestyle in retirement. This is also known as an income shortfall. This could be due to spending too much (and not investing or savings enough) or by taking on too much debt for the many years leading up to retirement, both of which leave an underfunded investment portfolio. This challenge is exacerbated by historically low interest rates that have prevailed in financial markets over the last decade.
Investors who are facing the challenge of a lack of sufficient income as they enter, or are in, retirement do have options to address this shortfall, even if not ideal. Behaviorally, they can reduce their spending to preserve the longevity of their portfolio. They could also seek (or continue) employment to bridge their funding gap by supplementing with the additional income to the extent needed, such as part time.
Investors may need to seek diversified total returns from a portfolio, rather than income or interest alone. An investor can include growth-oriented investments to enhance return from diversified return sources if prudently allocated within a determined risk tolerance. This could be an efficient investment strategy to pursue but still may not be sufficient if expected market returns are not enough to support required spending.
This cautionary can be avoided. An investor can likely mitigate the risk of a retirement income shortfall by properly planning and implementing disciplined investment processes in the years leading up to retirement. Consistent incremental saving and investing, tax efficiency, diversification, and proper risk management, when properly implemented in a comprehensive strategy, can optimize the chances of being fully funded in retirement.
The key is to be intentional. An investor is more likely to accomplish long-term objectives if they understand and can specify how much they need, how much risk they can stand (and afford) to take, and what investment return they need to get there. If they understand these factors, then they can plan for how much they need to invest (and how) along the way to meet those objectives.
At NovaPoint Capital, we navigate these complexities daily. Contact us to learn how we can help you accomplish your financial objectives.