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In the earning phase, BlackRock advises investing solely for growth. This strategy is based on the observation that an investor who held only a single S&P 500 fund for 20 years would accumulate more wealth than someone with a diversified portfolio, even when accounting for recessions and market volatility. The rationale behind this strategy is that during the accumulation phase, one’s portfolio isn’t exposed to significant sequence risk – the risk of making poorly timed withdrawals, such as during market downturns – because there aren’t any withdrawals being made.
Upon entering retirement, BlackRock recommends shifting the portfolio entirely towards income-generating assets like bonds and dividend stocks. Over 20 years of drawdowns, a retiree who holds such a mix will have more money than someone with balanced assets, even after accounting for stock market growth. This approach seeks to mitigate sequence risk by generating regular payments without needing to sell assets, thus insulating the portfolio from market volatility.
However, Hao Dang, an Investment Strategist with Consilio Wealth Advisors, argues that there are more factors to consider than just safety and growth. He points out that focusing solely on income can bring its own set of risks including exposure to leverage, derivatives or lower grade credit, which could entail higher management costs.
Adding another perspective, Brandon Renfro, a Certified Financial Planner specializing in tax-efficient retirement planning, highlights the tax implications of switching to income-oriented assets. He notes that portfolios focused on generating income may be tax inefficient as they are often concentrated on high dividend stocks and fixed income investments, which are taxed at income tax rates. In contrast, systematic withdrawals from a diversified portfolio can be more tax-efficient because they might take advantage of favorable long-term capital gain tax rates.
While BlackRock’s approach to retirement investing offers a fresh perspective, it’s essential for investors to consider other factors such as tax implications and the potential risks associated with specific investment strategies. Consulting with a financial advisor could provide valuable insights into building a comprehensive retirement plan that addresses these concerns.
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