Investors will change the composition of their portfolios several times as they age in order to reduce risk and ensure a stable monthly check from their retirement plan to fund their living expenses, according to the Securities and Exchange Commission. Retirees will usually create a portfolio that concentrates their holdings into more conservative assets, including bonds, stocks with a middle or large market capitalization, cash, money market accounts and Treasuries.
Retirees cannot afford the risks of short-term swings in growth companies, such as a new company that went public and places most of its profits into expanding its business, and speculative sectors of the economy, such as solar panel manufacturers. One bad year for a growth company or a downturn in a particular sector can result in a retiree losing a significant portion of his monthly retirement plan withdrawals if he places most of his savings into these investments.
If more speculative investments experience a poor track record over a short time frame, a retiree will have a difficult time recouping his losses due to the limited number of years he has left to live. If a company loses 25 percent of its value, the stock of the company will have to appreciate by 33 percent from the new price just for the retiree to break even; an unlikely scenario if a retiree has few years left to live. In recessionary times, large companies usually experience smaller declines due to their large market share, allowing a retiree to scale back on her standard of living without severely undermining her quality of life.
Retired people make monthly withdrawals from their retirement portfolio to fund their living expenses, since they no longer work for a living or have a part-time job. Liquid stocks allow an investor to more easily convert his stocks into cash. Since most conservative companies have a large market cap and high liquidity compared to companies with a small market capitalization, retirees can more easily convert their investments into cash on short notice in case of emergencies.
While many high tech and new companies do not offer dividends, large companies that have hit a standard rate of growth every year and have limits to expansion usually offer dividends in order to entice investors to invest in their company. Dividends provide retirees with a share of the companies’ profits and account for a substantial portion of a retiree’s investment earnings, according to Thornburg Investment Management. Dividends on conservative stocks can easily equal 4 percent a year as of 2011, meaning that a retiree with a $500,000 portfolio could receive $20,000 in dividends annually.
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