Social Security and pension plans, when available, help many retirees navigate rising living costs, but a fixed income from these sources often isn’t enough. That’s why people also build nest eggs throughout their lives, investing in stocks and bonds instead of leaving their chances of a comfortable retirement to chance.
While those traditional assets alongside cash can build a good base of retirement savings, they also introduce their own risks. A stock market correction, for example, can reduce the nest egg at a time when retirees need to make withdrawals. To mitigate risk, some investors turn to gold, which can serve as a small buffer that hedges your portfolio against inflation and uncertainty. Read on for how gold can act as a “shock absorber” when markets are rattled.
What is a ‘shock absorber’?
Gold doesn’t provide income in the same way bonds or dividend stocks might. You won’t receive interest or cash flow for holding gold — but it can act as a shock absorber. These types of assets soften the portfolio impact of stock downturns and can reduce your risk.
Precious metals like gold don’t always go up when stocks go down, but generally, they don’t behave the same way stocks do. If your portfolio is made up primarily of stocks and stock funds, you’re more susceptible to market downturns than someone who has diversified. The precious metal can hold steady and may even outperform when the stock market takes a nosedive.
To be sure, you still should have stock exposure to increase your portfolio’s potential upside. But retirees can benefit by allocating 5% to 10% of their portfolio to gold.
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Designing a small gold position
While 5% to 10% is a common range for gold’s allocation in a portfolio, you can start with a smaller number like 3% and work your way up. A small benchmark helps ensure you don’t have to sell many assets in your current portfolio to reach the target. And people who are still working can prioritize gold investments leading up to retirement to reach the threshold without selling any of their stocks by using their income to buy small positions.
A low allocation in gold also keeps risk and fees manageable. You can cut out much of the complexities of investing in gold with gold exchange-traded funds (ETFs). These funds are highly liquid and often have low fees. Each ETF has an expense ratio that shows how much you will have to pay in fees to hold shares.
While physical gold has its benefits, it’s not as beginner-friendly due to low liquidity and higher fees. You also have to consider how to store physical gold, while an ETF handles all of the backend work for you.
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Cash-flow considerations
While buying gold has advantages, you shouldn’t raid cash reserves or skip essential expenses to build your position. Gold is an investment you can accumulate after checking off the basic boxes of personal finances. Make sure you have an emergency fund and have paid off any high-interest debt.
Financial advisors tend to recommend having at least enough money in an emergency fund to cover your expenses for three to six months. However, retirees may opt for saving enough for one to three years.
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