For those approaching retirement or already there, the question of how to invest our money to maximize returns while minimizing risk is at the heart of many of our financial concerns. With so much out of our control and so few clear answers, retirement investment questions can keep you up at night.
Here are a few of the most common issues and some suggestions for how to manage things to reduce stress.
1. Is my money invested so that it will be there when I need it?
Figuring out how to align your portfolio with your withdrawal strategy might be the most important investing issue that retirees deal with. It’s critical before designing any sort of retirement investing strategy that you have a handle on your spending needs and you know what you need to withdraw and when.
Taking this a step further, you must have a handle on your sources of retirement income. How much of your income will come from fixed sources like Social Security or a pension? And, how much will you need to withdraw from your various investment accounts and when? Beyond your day-to-day living expenses, you will need to plan for anticipated major expenses such as purchasing a car, a major trip or any number of other big expenses.
Matching your fixed sources of income with your projected expenses will tell you how large of an income replacement gap you need to fill, in other words how much of your monthly and annual outlays will need to come from your investments in retirement and non-retirement accounts. A good retirement calculator like the NewRetirement retirement planner can make this easy to figure out.
2. How do I allocate my portfolio? Do I have the right mix of investments?
Retirees have the competing goals of keeping ahead of inflation while not suffering undo losses when the market hits a rough patch. Your asset allocation should probably include some equities to allow for growth with the rest in asset classes like bonds and others that are not subject to as much volatility as the stock market.
What your allocation pie chart looks like will vary based upon your unique situation. A couple of options include:
1. The popular 60/40 (60% stocks to 40% fixed income). However, there really is no cookie cutter answer for asset allocation. This may or may not be the right answer for you.
2. The bucket approach is advocated by many retirement experts.
- In one bucket you maintain liquid assets — cash or other low risk investments in an amount to fund 1-3 years-worth of your retirement withdrawal needs. The reason for this bucket is to avoid the need to liquidate equities during periods when the stock market is down, realizing steep losses.
- The second bucket might contain up to five years-worth of living expenses and be invested in a combination of income producing investments and some that offer moderate growth opportunities.
- The third and most aggressive bucket will be predominately invested in stocks and more aggressive fixed and alternative type of investments. This bucket is designed for growth and to help you avoid running out of money by being too conservative.
The actual percentage allocation to each bucket will vary by household and how much you need and want to spend.
3. What do I need to do on an ongoing basis?
Just as with any stage of life, “set it and forget it” will not work for your retirement investing strategy. You will need to rebalance your portfolio to your target asset allocation periodically, generally at least annually. Market ups and downs can cause your portfolio to deviate from the target allocation leaving you with an allocation that takes too much or too little risk for your situation.
Beyond rebalancing your investment strategy will need ongoing monitoring, and potentially an update as well. An update in strategy may be needed in order to support your withdrawal needs or due to changes in your situation.
Flexibility is key watchword for investors during retirement.
4. Should I buy an annuity? Or, is it a scam?
Annuities can be a great way for those in or near retirement to stabilize a portion of their income. Some feel this is another leg on the retirement income stool along with Social Security, pensions and your various investment accounts.
Annuities can be a solid investment, but too often annuities are sold rather bought. Annuity contracts can be complex to read and understand, it is difficult for many investors to fully grasp the restrictions, underlying expenses and the surrender fees.
- If you are considering any annuity you really need to shop around. Beyond what is offered by those actively trying to sell you an annuity, look at low cost, no-load options like those offered by Vanguard and others.
- It is appropriate to ask how much you would receive in monthly income from several carriers and compare the answers. You will find that the payments may differ widely for the same annutization option.
- Another key question is how much of your nest egg do you want to commit to an annuity?
You might also want to explore other ways to produce retirement income.
5. What if I don’t need to make withdrawals?
For those of who are fortunate to have large fixed sources of retirement income from sources like a pension and/or Social Security, the amount that you need to withdraw from your retirement plans might be negligible. This will impact your investment strategy.
If your goal for this money is to grow it and leave a legacy for the next generation and perhaps to fund a charitable bequest, you can take a bit more risk with this money, depending upon your age and health. While nobody can predict how long you will live, your age and time horizon will impact the level of investment risk you can take with this money.
6. Am I getting good advice from my financial advisor?
Only you can answer this question. Are you comfortable with managing your own investments and integrating your investment and retirement withdrawal strategies? Would a one-time second opinion from a detached financial professional be valuable to you? If you are married and you are the person who does all the “financial stuff” will your spouse feel comfortable taking this over in the event of your death or incapacity?
Trust is one of the biggest factors with an advisor. There are two things you should do for a good advisor / client relationship:
- Make sure that you understand exactly how your advisor is compensated — do you pay them a fee or do they earn commissions on products they sell you? Be especially wary if they are earning commissions.
- Ask questions and make sure you understand the answers. Does your advisor explain things in a way that leaves you with questions? Do you feel that you understand the strategies and tactics that are recommended to you? Studies show that people feel more comfortable with investment advice when they understand it.
7. Have I thought of everything? Will I run out of money? Are my investments in line with my plan?
Investing during retirement is equally or more important than the investment decisions you made during your working career while saving for retirement. But, it is more complicated, because you are taking money out of your accounts as you still try to maximize returns. And, you don’t want to run out.
There is no cookie-cutter approach for success. However, having a really detailed retirement plan, keeping it updated each quarter or year and making the necessary adjustments is one of the best things you can do. The NewRetirement retirement planner is one of the most comprehensive tools available online and it allows you to save and update your information. This planner helps you anticipate medical and other unexpected costs and tells you exactly when you might be at risk for running out of money — for both an optimistic scenario and pessimistic one.
You’ll be able to adjust your financials and discover the best ways to have a more secure financial future. Forbes Magazine calls the system “a new approach to retirement planning” and it was named a best retirement calculator by the American Association of Individual Investor’s (AAII) and CanIRetireYet.
See how different investment strategies impact your retirement plan
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