Investing during retirement can be something of a catch-22. On the one hand, you want to keep your money growing. You don’t want to let it languish in a no-interest checking account, though doing that may cause you to lose value relative to inflation. On the other hand, you want to keep your money safe. You’re done working which means there’s likely to be no more reliable income with which you can replace portfolio losses. Investing in retirement, then, is about balancing these two needs. Here are key issues to consider before picking specific securities or an asset allocation. You can also work with a financial advisor who can advise you on the best investment choices for your unique situation.
Rate of Withdrawal vs. Approach to Risk
Your rate of withdrawal, meaning how much you need to take from this account each month, can help inform your approach to risk. If you have invested in traditional assets like stocks and bonds, over time most portfolios can recover from short-term losses. During 2022, for example, the value of most stock portfolios has dipped considerably. Over the next several years, those investors can likely expect to recover their losses as the market resumes its growth.
What’s different for a retiree is that you don’t always have the time to let those assets sit still. You need to periodically sell assets and make withdrawals because this is the money you will live on.
So for a retiree investor, the rate of withdrawal is an essential issue when it comes to risk management. The more money you need to withdraw each month, the less flexibility you’ll have to leave assets alone and recover from losses. By contrast, the less money you need each month as a proportion of your overall portfolio, the more flexibility you’ll have to leave your portfolio alone after a downturn. Or if you have alternative assets that you can rely on in case of losses, the same rules apply.
The more you can leave assets in place during a down market, the more aggressive you can get with your investments during retirement. Knowing your rate of withdrawal will help define that flexibility.
Broadly speaking, there are two general approaches to investing as a means of income. The first is capital appreciation investment. In this case, you invest in assets that you intend to sell. When assets appreciate in , for example as a goes up, you sell the investment and use the capital gains as a source of personal income. Most investors keep the profits from the sale and put the original capital back into new investments.
The second approach is income investment. In this case, you invest for assets that you intend to hold. Those assets then generate payments over time, such as the interest from a bond or the payments from a stock. That yield becomes the source of your personal income and you make active trades to maximize your portfolio’s payments over time.
Capital appreciation investment tends to be a /higher reward approach compared with income investing. You can make more money, but you face a greater chance of loss. On the other hand, while income investing is far more reliable than capital appreciation, you generally need more money invested to generate meaningful gains.
For a retiree, income investing is often a strong option if you can afford it. This strategy provides the kind of structure that retirees generally prefer. But many investors may find that they don’t have enough upfront capital to make this. are another form of fixed-income asset that can be a strong asset to the right portfolio, but they may require earlier investment to generate meaningful returns.
Within the overall marketplace, consider the risks of both investment and noninvestment. Noninvestment can leave you vulnerable to inflation. For example, leaving your money in something like a savings account can actually generate significant losses. If you’re making 1% interest during 7% , then you have effectively lost six points of value over the year. That may suggest choosing a more aggressive investment option to compensate for those soft losses.
By contrast, investing in a down market is often a good move but be sure to consider your personal needs. As noted above, retirees have a much shorter window when it comes to investing because they need to make active withdrawals from their portfolios. So a bear market that might create opportunities for someone who can might not work for someone who needs to sell those assets in 18 months.
Many investors fail to understand that their retirement assets are often . While your withdrawals from a aren’t taxed, just about any other retirement asset is subject to income and maybe also capital gains taxes. That includes 401(k) accounts, IRAs and even Social Security. When you invest for capital appreciation, you will pay capital gains taxes on your withdrawals. If you invest for income, such as , you might pay income taxes.
Investment shouldn’t stop just because you entered but your strategy should probably change. Once you’ve stopped working it’s time to start building plans around how much financial flexibility you have, what your goals are and what kind of risk you can accept now that there’s no new money coming in the door. Make sure you choose investments that are going to help your overall financial goals.
It’s really important to consider the fact that you don’t have to do anything on your own. You can work with a financial advisor who can help manage your portfolio and give you the pros and cons of retirement investment choices. If you don’t have a financial advisor, finding one doesn’t have to be hard. matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, .
Many advisors suggest that retirees should focus entirely on safe assets like bonds and banking products. That’s not a bad approach for the money that you need, but you don’t have to eliminate risk entirely. Just make sure you keep your actual income safe while .