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Protecting Your Portfolio from Old Age

A reader writes in, asking:

“I recently read that the average person’s ability to make good financial decisions starts to decline as early as their 50s. Aside from hiring an advisor (too expensive) what can be done?”

There are several possible steps to consider, each with the goal of either simplifying your portfolio or reducing your reliance on your portfolio.

First, it can be helpful to reduce the number of investment accounts you have — and keep them all with one firm. Rolling all of your previous employer-sponsored accounts into IRAs, and combining all your IRAs at one place makes things much simpler. It’s easier to stay on top of everything if you can see it all at once on a single statement or website.

Second: Create a low-maintenance portfolio. If you’re worried about a decline in your ability to make good decisions, you don’t want to be bothering with individual stocks or actively managed mutual funds, trying to follow them closely enough to know just when to sell (a difficult task for even the sharpest of investors). A portfolio of passive, broadly-diversified mutual funds requires less work. And the fewer holdings you have, the easier it is to rebalance your portfolio as necessary. For many investors it will even make sense to simplify all the way down to a single all-in-one fund that requires no ongoing maintenance.

Third: Delay Social Security. While waiting to take Social Security often makes sense purely based on the numbers (especially for the higher earner in a married couple), it also has a benefit from a simplification standpoint in that it provides you with a safe source of income that doesn’t require you to make any ongoing decisions.

Fourth: Buy a single premium immediate lifetime annuity. Such an annuity is basically a pension from an insurance company. Buying such an annuity is typically a worse deal than delaying Social Security, but doing so can make sense if you want to further increase the amount of non-portfolio income you receive each month (i.e., income that, like Social Security, does not require any ongoing decisions).

And finally, I do think that hiring somebody to manage your portfolio is one of the better ways to protect yourself against declining financial acumen. At the risk of sounding like a broken record (having discussed this just last week), there are now several firms that offer portfolio management for a fairly low cost — either a small percentage of the portfolio (less than half of one percent per year) or a flat fee.

Of course, none of the above strategies are one-size-fits-all. Some might make sense for you while others do not.

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