What does diversification mean, especially in retirement?


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Diversification is a term thrown around a lot in discussions of investments, stocks, and money, but do you know what it really means?

Like the meaning of the saying “don’t put all your eggs in one basket”, diversification is a form of risk management.

What many people don’t realize is that diversification, and what it means, changes when you retire.

Retirement Income: Diversification in a Retirement Strategy

Like the meaning of the saying “don’t put all your eggs in one basket”, diversification is a form of risk management. What many people don’t realize is that diversification, and what it means, changes when you retire.

What is diversification?

Diversification basically means that you are making sure that where you keep your money is mixed and varied to minimize your risk while maximizing your return.

For most people, when they are in their working years, diversification is mostly going to deal with your stocks and bond holdings. For example, we once worked with a client named Jared, who invested 100% of his 401(k) in the stock of the company he worked for.

The stock was riding high for a while and then whammy, the company couldn’t swallow a large acquisition, filed for bankruptcy, and down the drain went Jared’s 25 years of hard work and several hundred thousand dollars. That’s a very hard way to learn the principle of diversification.

When investing in stocks, you should have holdings in several companies spread across several industries and even several countries. That way, if one company goes bankrupt, or otherwise takes a big financial hit, you can make it up with gains from the others.

It is important to understand your personal risk tolerance before investing. Risk tolerance is basically the amount of risk you are comfortable taking on.

While factors such as age and income are going to contribute to your risk tolerance, your personal ability to handle swings in the market should be the main starting point in determining where you should put your money.

At Cardinal, we have a risk tolerance questionnaire you can take that scores you and puts you in a risk tolerance category, from converstative to moderate to aggressive. This will give you a good starting point to understanding your personal risk tolerance.

We have found that many people who come to us are either invested too risky or not risky enough. They are taking misguided advice from friends and family, got on the sideline when the market crashed, or are just too overwhelmed to make any real decisions.

Proper diversification protects you, your family, and your money from the whims of the market. At Cardinal, diversification is the number one investment principle we follow.

Listen to learn more about diversification in retirement:

How does diversification of money change in retirement?

When people come to us for help, they are normally nearing retirement or already retired.
Even though they are entering this new stage of life, they typically believe that their money and investments should just stay where they are.

Your money changes in retirement. You go from bringing in a consistent income to having to live off your savings. You have a Social Security check, possibly pension payments, coming in. You have to now start distributing your IRA and 401(k).

With your investments, you do not have 40+ years to accumulate anymore. When you are young, and putting money in the market, it is easier to be risky because you have time to wait for the market to upswing again.

In retirement, you just don’t have that time anymore. Large dips in the market can cause significant impacts on your monthly income. You need to make sure your money, or at least a good portion of it, is not in high risk investments anymore.

On the other hand, it is also important to make sure your money is not too safe in retirement. Retirement now lasts 30+ years for many people. Your money needs to continue growing, not only to keep up with inflation, but also to make sure that you don’t outlive it.

Besides stocks, bonds, and cash, there are other places to put your money in retirement that can guarantee it’s safety, while also providing you with a lifetime income.


MYGAs, or Multi-Year Guaranteed Annuities, are commonly referred to as “CD annuities”. These are annuities that are actually meant for accumulation instead of distribution.

MYGAs are simply a tool to earn higher interest on your savings. It gives you a predetermined and guaranteed interest rate for a set period of time, allowing you to create an additional savings bucket in retirement.

The time period can vary anywhere from 2-10 years, with 5 years being the most common term. Interest rates are going to range anywhere from a little over 1% to over 3.5%.

A MYGA is really for people who are close to or in retirement. If you are younger, you are typically going to find better returns, and can take the risk, with a savings vehicle like an investment account of stocks and bonds.

Most retired clients we see have a significant amount of money just sitting in their savings account “just in case”. It is typically more money than you would need for an emergency situation. MYGAs work perfect for them, because they can earn a higher interest rate while knowing exactly how long their money will be “tied up” for.


A Single Premium Immediate Annuity (SPIA) or a Fixed Index Annuity (FIA) are both great vehicles to provide you a guaranteed income you cannot outlive in retirement.

With a SPIA, you are giving an insurance company a lump sum of money that will immediately be turned into income payments that can last the rest of your life.

FIAs are a long term investment, where you make payments toward the policy, allowing you to turn on a guaranteed income at a later date when needed.

If you purchase a FIA or a SPIA with part of your retirement money, you will tie up that money and pay fees within the contract. What you will receive in return is protection from an insurance company against some very scary things: market losses, outliving your savings, and not having enough money to pay long-term care expenses.

Annuities are poorly understood and much criticized insurance products. Like any investment, if it is purchased by the wrong client for the wrong reasons in the wrong amount, it is a bad deal. But they can also be a useful and valuable policy for some people.

Life Insurance (with cash value)

Life insurance is a product that is very important for those still in their working years, but also can provide invaluable protections to those in retirement.

Cash value life insurance has become a way for people to not only make sure their family is taken care of but also reduce their taxable income in retirement.

These policies, due to the way they are designed, are able to participate in the upside of the stock market without participating in the downside. They are safe, secure, and grow at a guaranteed rate.

Basically, once you reach a certain point in these policies (often 7 or more years), you can pull money from them, usually tax-free via loans or withdrawals of basis.

If you do not pay the money back while you are alive, your policy’s death benefit will pay back the money at death. The amount borrowed is subtracted from the death benefit paid out and your beneficiaries will receive the remainder of the tax-free death benefit. If this cash value is not needed, the full amount can pass to you heirs in a very tax efficient manner.

When you get to be 65, and then 75 and you’re looking forward, income and the guarantees of income should become much more important to you than returns on investment.

Cardinal can help you figure out how to create a diversified asset portfolio that takes this recommended shift in perspective into account as you get older.



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