Your Pension Is Local. Should Your Portfolio Be?

After a career in public safety, you may retire with something many Americans would love to have: a pension that provides income for life.

You may also have a 457, DROP account, TSP, IRA, or other investments you’ve built alongside it. Those assets can help pay for travel, support family, cover large expenses, and give you choices as retirement unfolds.

That raises a practical question: Should all the stocks in those accounts be American stocks?

It’s easy to see the appeal. You know the companies. The U.S. market has delivered strong returns for years. And if your pension and expenses are in dollars, investing overseas can feel like taking an unnecessary detour.

But familiarity alone isn’t a good reason to limit where your retirement money can grow.

A strong pension doesn’t make concentration harmless

A pension can cover a meaningful share of your regular expenses. That may give you more flexibility with your investments, but it doesn’t mean those investments have no purpose.

Think about what might happen between your retirement date and your 80th birthday. You could decide to travel more, help a child buy a home, replace a vehicle, or pay for care that wasn’t in the original plan. Inflation may also change what your pension check can buy.

Your portfolio needs to be ready for a future you can’t map out exactly. Owning companies across the U.S. and other countries is one way to avoid tying all of its stock returns to a single market.

“But U.S. stocks have done better”

For much of the past 15 years, they have. That’s a fair reason to ask why you would own international stocks at all.

The answer is that last decade’s winner isn’t an instruction for the next decade. U.S. and international markets have traded periods of leadership, sometimes for years at a time. A globally diversified portfolio accepts that we won’t know the next leader in advance.

That means you will sometimes own stocks that trail the U.S. market. It can be frustrating when you compare account statements with a headline about the S&P 500. But the purpose of international investing is to give your plan exposure to opportunities beyond the U.S., not to win every short-term comparison.

Consider the “lost decade” from 2000 through 2009: the S&P 500 returned about −1% a year, while developed international stocks returned about 2.5% a year. If you were retired and drawing income, that difference gave you another part of your portfolio to draw from while U.S. stocks struggled.

What changes when the paychecks stop?

During your working years, you can keep contributing through a downturn. In retirement, you may need to take money out while markets are down.

That timing matters. Selling investments after a steep decline leaves fewer shares in place to participate in a recovery. It’s one reason we pay attention to the order in which good and bad returns arrive, along with the average return over time.

Global diversification cannot prevent losses, and it cannot guarantee a better retirement outcome. It does keep your stock allocation from depending entirely on how one country performs while you’re drawing from it. The right mix still depends on your pension, other income, spending needs, and how much market risk you can live with.

How does this fit into a retirement plan?

We start with the income the household needs and identify what the pension and other reliable sources will cover. Then we look at the job each investment account must do, both now and later.

From there, we can decide how much to hold in stocks, how much to hold in more stable investments, and how to spread the stock portion across markets. We revisit those decisions as life changes rather than changing course every time a country moves to the top of a performance chart.

If you spent decades building a pension and saving in a 457, DROP, or TSP, your investment decisions deserve the same care you gave the rest of your career. The goal is a portfolio that works with your retirement income plan and gives you room to make the most of what comes next.

Ryan McLin, CFP®, MBA, TPCP®, is a former police officer and the founder of Impact Wealth Group, a fee-only wealth management firm in Fort Worth, Texas. The firm helps public sector professionals and others plan for retirement and major career transitions.

This article is for educational purposes and is not individualized investment advice. All investing involves risk, including the possible loss of principal. Diversification does not guarantee a profit or protect against loss.