Managing Your Retirement Portfolio

You can manage your retirement portfolio to achieve any one of the following objectives:

Increase the portfolio balance - gains exceed withdrawals
Maintain a stable portfolio balance - gains equal withdrawals
Let the balance decrease - gains less than withdrawals

Increasing your portfolio balance or maintaining its value during retirement presumable lets you meet all your own financial needs and have money left for your heirs. Letting the balance decrease may achieve the same result but the amount of money left to your heirs will be less than the two other alternatives. And if you plan to spend down the balance, you have to make sure you don't run out of money while you're still living.

How Long Will Your Money Last?

The simplest rule of thumb is to divide the portfolio total dollar by the amount you plan to withdraw the first year. The answer is the number of years you have before the balance is zero. Obviously this method does not take into account inflation and rate of return of you investments. To see how inflation and rate of return effects your portfolio refer to the examples in How Long Will Your Money Last? and Drawdown Curves.

How the Value of Your Portfolio Changes

Your portfolio decreases in value because of withdrawals and decreases in the value of investments. Your withdrawals can increase because of new unexpected expenses and increases in expenses due to inflation. You can try to offset these decreases with gains.

Your gains come from interest, dividends, paper (unrealized) gains and capital gains (realized) from profitable sales. Interest and dividends are automatic once you own the investment and do not require you to take regular action. A paper gain occurs when an investment appreciates but you do not sell it. Of course the investment can go down in value.

If these gains exceed the withdrawals you may not have to depend on realized capital gains to provide you with funds to maintain your portfolio's balance. But if you must rely on realized capital gains, you will have to be an active investor because a reliable stream of capital gains requires you to sell stock you already own or buy and sell stocks in the future. If you're not prepared to devote significant time to make informed buy and sell decisions, you should not plan to rely on capital gains as a significant source of gain.

Your job as the Portfolio Manager

How much time and effort you have to spend with your portfolio depends on the structure of the portfolio and if you have to achieve capital gains. If you are simply living off interest and dividends, your job is simple. Monitor the portfolio monthly to see the companies are still paying the dividends as expected. Check to determine if you need to redeploy cash because interest rates have changed or you have to renew a certificate of deposit. If you decide to buy new investments or add to existing investments, read Making Buy Decisions.

However, if you're seeking capital gains, you must be actively involved in buying and selling investments. The degree of your activity depends on how much money you must generate. Read Key Investing Principles and Summary of Investing Guidelines for the Long-term Investor.

Deciding What to Sell When You Must Withdraw Money

Each year presumably you'll have to withdraw money from your portfolio for expenses or because Federal law requires you to do so. Assume you have a mix of investments (stocks, index funds, mutual fund bonds and cash). What investments should you sell? There is no one answer that fits all situations but here are some useful guideline:

Withdraw cash if all the other investments are performing well.
If you don't have enough cash to meet your withdrawal amount, sell the investment(s) you expect to perform the poorest in the near future. For example, sell a bond fund if interest rates are rising (the price of shares will decline as interest rates rise). Or sell a stock that has made a large gain and you think is near its peak price.
Sell a cyclical stock that has had a prolonged upside.
Sell a mutual fund or stock that has had a prolonged upside (You don't have to sell all you own but take some profits when you have them.)
Sell any junk stocks that have fundamental business problems.
Sell mutual funds that charge the high fees.
If you're not sure what to do, sell equal amounts of some or all of the investments.
Don't sell stocks or mutual funds that are down in price but still are good companies (sell high, not low). These investments will probably increase in value in the future.

For more information about selling stocks read Making Sell Decisions.

Updated December 17, 2007.