Investing after retirement is anything but straightforward. Retirees have to juggle finding safe investments to protect their income streams while not being so safe they risk running out of money in retirement. Every retiree faces this challenge and dilemma. The author in the article below sets out a few “rules” to follow that will help you invest your retirement money in a more meaningful manner. Team RetyrSmart
Safe but not so safe. Managing the investment dilemma after retirement
How to invest your retirement money?
Be mindful of risk
It can be hard for retirees to tone down their risk appetite when investing in retirement – they’ve had decades of practice at investing for growth, after all. Although a potentially bigger return is enticing, there isn’t time to make up for any significant losses. A properly diversified portfolio is “key to maximizing returns over a longer life expectancy while managing risk appropriately to avoid significant short-term losses.” Retirees can take income from the conservative portion of their portfolios while allowing another portion to continue growing
Watch out for inflation risk
While the risk of portfolio declines can’t be overlooked when investing in retirement, retirees also face another type of risk: The risk of running out of money in retirement. Even though we have low inflation today, it’s critical for retirees to keep up with inflation. So you may need to moderate the impulse to seek safe investments for seniors by including some growth-oriented ones in your portfolio, too.
To find Retirement friendly inputs in your Inbox
Subscribe to our Newsletter
Think like Goldilocks
The dual-risk retirees face means you should think of investing in retirement like Goldilocks. The “just right” investment strategy means not investing for a higher rate of return than your retirement needs. If your retirement investment analysis shows that a 5% average return will give your retirement lifestyle a high probability of success, why invest for a 10% return? To help you keep risk in perspective, separate what you need for retirement from any assets you want to accumulate and pass on as a legacy. This way you can grow the assets you do not need for retirement without risking your future security.
Break your retirement down into five-year segments
The challenge when investing after retirement is that no one investment or investment style can address the needs of a 30-year retirement. Each five-year segment, such as age 65 to 70 and 70 to 75, has its own unique lifestyle needs and therefore investment needs. The money invested in the first two or three segments, during which time retirement income needs are highly affected by the stock and bond markets and the sequence of returns, should be invested more conservatively than money invested in later retirement years. Segments three through five (or years 11 through 25) can be invested for growth since they’ll have time to recover from negative or bear markets.
Consider real assets for diversification and inflation protection
Real assets like REITs, infrastructure, commodities and natural resource equities are a means of providing diversification, long-term return potential and inflation protection. Since real assets have generally performed well when both stocks and bonds have underperformed at the same time, real assets can help defend against otherwise challenging market environments. For the best results, retirees should invest across multiple real asset classes.
Have a drawdown strategy
A challenge when investing money after retirement is switching from an accumulation mind-set to a preservation mind-set. Your investment objective becomes making the most of the retirement investments and income streams you have. To do this, retirees should have a drawdown strategy. Retirees can increase the expected lifetime value of their savings by leveraging them in a tax-efficient manner and optimizing their Social Security claiming strategy.
Have an estate plan
Investing money after retirement isn’t only about you and your retirement income needs. There’s also your beneficiaries to think about. An estate plan is essential to ensuring any inheritance you leave reaches your beneficiaries in the most tax-efficient manner possible, and your wishes are carried out. Have these planning documents in good order: a will that empowers your executor to carry out your wishes, a living trust to avoid probate, a power of attorney enabling someone to act on your behalf in financial decisions, a health proxy doing the same for health decisions and a living will with advanced directives to physicians.
To sum it up, rules for investing after retirement:
- Be mindful of risk.
- Watch out for inflation.
- Think like Goldilocks.
- Break your retirement down into five-year segments.
- Consider real assets for diversification and inflation protection.
- Have a drawdown strategy.
- Have an estate plan.