The Biggest Mistakes Retirees Make With Their Investment Portfolios -- and How to Avoid Them

Key Points

• Investing too conservatively could leave you short of income.

• Tapping investments when they're down could have a negative long-term effect.

• Forgetting about real estate could mean missing out on diversification and income-generating opportunities.

• The $23,760 Social Security bonus most retirees completely overlook ›

A lot of people work really hard to build up a retirement nest egg. If you're approaching your senior years with a large balance in an IRA or 401(k), you probably gave up a lot to accumulate that wealth. So now, it should buy you the dream retirement you deserve.

But saving for retirement is only half the battle. It's important to make sure your investment portfolio is working for you once your career comes to an end and the time comes to start living off your savings. Here are some of the biggest mistakes retirees make with their portfolios -- and how you can avoid them.

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1. Investing too conservatively

Workers are often told to load their portfolios with stocks to generate strong returns while they're in the process of building savings. Once you retire, you may be inclined to scale back on stocks to unload some of your risk.

That's definitely not a bad idea. But one thing you don't want to do is maintain too conservative a portfolio during retirement, either. Limiting yourself to, say, 10% stocks could mean minimizing risk, but also minimizing the returns your portfolio continues to generate.

You need your savings to be able to keep up with and, ideally, outpace inflation during your retirement years. This is especially important given that Social Security's cost-of-living adjustments often do a poor job of helping retirees maintain their buying power from one year to the next.

So to that end, don't be so quick to ditch stocks once you're retired. Instead, make sure the stock portion of your portfolio is well balanced. Also, you may want to favor dividend stocks over growth stocks, since they tend to be less volatile and generate steady income that could help offset other potential portfolio losses.

2. Tapping investments early on when they're down

Some retirees have the unfortunate luck of seeing the stock market decline just as they're getting ready to tap their portfolios. If that happens to you, and you withdraw from a declining portfolio, you could end up with an income shortfall throughout retirement.

When stock values are down, you need to sell more shares of the ones you own to get the income you're after. That means you'll be left with fewer shares by the time the market recovers.

The solution? Have about two years' worth of living expenses in cash. That way, if the market tanks at the start of your retirement, or at any point during your retirement, for that matter, you may not have to sell investments at a loss to generate the income you need.

3. Forgetting about real estate

One of the most important things you can do in retirement is maintain a diversified portfolio. And to that end, one corner of the market you don't want to neglect is real estate.

Property values don't always rise and fall with stock values. So real estate can serve as a great hedge at a time when you're reliant on your portfolio for income.

That said, you don't need to own physical real estate, like a rental property, to benefit from this strategy. Instead, you could invest in residential REITs, or real estate investment trusts.

Residential REITs are companies that own residential properties. These could include apartment buildings or student housing complexes.

While investing in any type of REIT might allow you to diversify nicely, one positive thing about residential properties is that they're somewhat recession-proof, since people will always need a place to live, regardless of the economy. That makes residential REITs a particularly compelling choice for a retirement portfolio.

After working hard to build your nest egg, you deserve to enjoy retirement to the fullest. Avoiding these investment mistakes could help you do just that.

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