Boston — It's called a ``portfolio,'' and it refers to a group of investments. Maybe it should be called a ``chameleon'' instead, because that group of investments can and should change when the need arises. No one expects to create a portfolio -- stocks, bonds, and mutual funds -- and let it sit there. Changing economic conditions, gains or losses by the investments themselves, and changes in the life of the investor all require that the portfolio be managed. Some stocks are sold, new ones are bought, the balance between types of investmenets is changed.
This is particularly true in the years leading up to retirement.
``It's not a matter of rolling out of bed one day and changing your investments when you retire,'' says Larry W. Carroll, a financial planner in Charlotte, N.C. ``We see it as a three- to five-year process.''
``This way,'' he says, ``if you have certain investments maturing within that three- to five-year ``window,'' you can build it into your planning and cash them in when they come due, not all of a sudden.''
``Also, if you're getting close to that window, you don't do 10-year investments.''
``About a third of my clients are in that five-year time period going into retirement,'' says Greg Confair, a planner in Allentown, Pa.
In that time, he says, people approaching retirement can set some final pre-retirement goals and achieve them. They should not aggressively try to surpass those goals, he warns.
``The worst planning mistake you can make is reaching your objective and then giving it back because of greed,'' he said.
The way to set such goals is to first decide what sort of income stream you'll need after retirement. With just five years left until that date, it is easier to make projections about inflation and the earning potential of your investments.
``You have to figure out what spending power you want and set your goals based on that,'' Mr. Confair says. ``Determine how close you are to achieving that objective now.'' If your years of saving, investing, building up your pension, and social security have brought you close to completing the nest egg that will spin off your retirement income, there's not much more that needs to be done. Now's the time to hold on to your money and not risk it on fancy new investments.
``If you're within five years of retirement, stay away from aggressive-growth investments,'' Mr. Carroll says. ``Look for more income-oriented funds.'' While he is not specifically advocating mutual funds for everyone, Carroll says, many people do like them, because they usually experience less volatility than direct ownership of stocks and bonds does.
``Whether or not to go with mutual funds depends on the personality of the client,'' he says.
Before retirement, many people -- especially those in upper-income brackets -- invest in municipal bonds. Usually the advice for retirees is to get out of ``munis,'' because the tax-sheltering feature is not so necessary and because they may not have as great an income stream as higher-yielding taxable investments.
This is not the case these days, Carroll notes. ``I would move out only if we were scared of the [municipal] bond market,'' he says. ``At this point we're not. Munis are excellent now. We're in a rare situation where the municipal tax-free yield is more than that of Treasury bills, which are taxable.''
As for bonds in general, Carroll says many people make the mistake of buying them and letting them sit there. ``The bond market can be volatile,'' he notes. ``Bonds are something you need to trade, buy, and sell, based on the interest-rate scenario you're in. Don't buy them and forget them.''
Having a five-year ``window'' to change your investments before retirement helps ease the tax bite of making changes in that portfolio and gives you more control over when to sell.
``Phasing lets you plan your taxes to take any losses when you need them,'' Carroll points out. ``Also, if you have any gains, and you know you have three to five years to sell, you can avoid selling in a down market. You can wait for the best time, so you can sell when it's at a high.''
Sometimes, Confair says, an unexpected event will come along to change your retirement planning. Right now, for example, planners and pre-retirees are trying to figure out how to react to the tax reform bill.
``If you have a pretty good pension and your own savings, and aren't relying on tax shelters, the tax bill should be no worse than neutral and may actually help,'' he said.
Finally, a five-year time frame fits in nicely with another useful but sometimes overlooked source of retirement income: US Savings Bonds.
Currently, Series EE Savings Bonds are paying 7.5 percent interest if held at least five years. That 7.5 percent level has been the minimum the Treasury Department says it would pay on these floating-rate bonds, but with interest rates staying low, Treasury officials are considering a lower base. EE bonds bought this month, however, will continue to pay at least 7.5 percent for the full term. (A different rate has not yet been announced for October, or any other month.)
With EE bonds, you can get the interest in a lump sum at maturity or receive periodic checks for interest.
After maturity, EE bonds can be cashed in or converted to Series HH bonds. Conversion is the only way to buy HH bonds. They pay interest every six months, and while that interest is taxable, the burden may not be great for a retiree who is apt to be in a lower bracket.