Whether you’ve been a savvy investor your whole career, or you’ve decided now’s the time to buckle down on obtaining additional income, investing in retirement can be a challenging endeavor. As you strategize and weigh your options, there are a few key factors to keep in mind that can help guide you toward the right solutions for your particular needs. We’ve outlined these considerations below, as well as the types of investments that may work for you throughout retirement.
Investment Considerations For Retirement
Creating a steady source of income throughout retirement is typically done through lower-risk investments as compared to how you may have invested while saving for retirement. However, you must be careful about being too conservative with your investment strategy. Although many people are more concerned about market risk, inflationary risk may pose an even bigger issue over what may be, for many, a 30-plus year retirement.
There are numerous factors that can affect which types of investments may work best for you including your timeline, risk tolerance and personal goals. As you seek out the right investment options for you, be sure to keep the following factors in mind.
Balance Your Income and Expenses
At its core, retirement is a balancing act. You need to obtain income to cover expenses. And without a paycheck or proper plan in place, this can get tricky. There are two popular investment approaches most retirees use to obtain income throughout retirement: the bucket strategy and systematic withdrawal approach. The bucket strategy essentially divides up your retirement into stages. Your savings and assets are distributed at different intervals throughout retirement, such as a five or 10-year period depending on your income gap and immediate needs. Alternatively, the systematic withdrawal approach uses a wide range of assets and a diversified portfolio to offer income distributed at even increments throughout retirement.
Extended Life Expectancies
As you focus on developing alternative sources of income, it’s important to remember that you could be living in retirement for longer than anticipated. In fact, just between 2000 and 2016, the average life expectancy increased by 5.5 years.¹ Today’s retirees can expect to enjoy retirement for anywhere from 15 to 30 years, longer than previous generations. In terms of investments, this presents a need to consider long-term investment options that can provide income during your later years.
Prepare For the Unexpected
The longer your life, the greater the chance there is that you’ll experience unexpected expenses. This can include anything from loss of income due to the death of a spouse, the need to pay for a grandchild’s college tuition, or long-term healthcare expenses. In fact, there is a 70% chance that someone turning 65 today, will need some type of long-term care services and support during their remaining years². It’s important to stay flexible in your investment options and retirement strategy, as you never know what expenses may lie ahead.
Types of Investments
Once you’ve taken into consideration the factors that can affect your income throughout retirement, you should weigh your actual investment options. Below are a few of the most common types of investments you may want to consider using throughout retirement.
While bonds may have been an unappealing option in your younger years due to their relatively low rate of return, they can offer reliable income that works well for many throughout retirement. If you’re looking to create steady payouts, consider investing in a variety of bonds with different maturity rates, as these will create smaller payouts over time instead of leaving you with one lump sum.
Certificates of Deposit
With certificates of deposits, or CDs, the longer you leave them alone, the greater the payout you’ll receive. Typically done through a bank or credit union, think of CDs as savings accounts that you can’t access for a certain period of time. You choose a predetermined length (anywhere from a couple of months to many years) and are given an interest rate. Generally speaking, the longer you wait, the higher the interest will be. Once the time period has passed, you get your money back along with the interest it has collected. This can be a beneficial alternative to leaving your excess money in a savings account because it helps you save for later in life.
Typically, the older you get the more conservative you’ll want your investments to be. But that doesn’t mean you should count out stocks completely. Depending on your age, risk tolerance, and other aspects of your retirement strategies, stocks that offer slow, steady growth can have the potential to increase your earnings at a greater rate than other types of low-risk investments. One approach is to consider searching for those that offer dividends, as these can potentially create regular payouts throughout retirement.
Do You Need a "Warchest"?
A "war chest" is an amount of money specifically set aside to help navigate difficult markets when (not if) the market declines for an extended period of time. You should first determine the amount of income you will need from your investments as compared to other income sources such as social security, pensions, part-time employment, etc. Your war chest should likely have somewhere between 3 to 5 years of this income amount set aside in some combination of cash, bonds and short-term investments. For example, if you need $20,000 per year from your investments, you might consider having approximately $100,000 in your warchest. The amount in your war chest should be based on your specific income needs. But be sure you have an effective process for refilling your war chest (strategic rebalancing). If your war chest gets too high, you may be sacrificing long-term performance. While allowing the war chest to get too low, may put you at risk of an extended market downturn such as what occurred during the Financial Crisis when the S&P 500 declined 57.7% from October 2007 to March 2009.⁴
Keys to a Successful Retirement Income Investment Strategy
- A warchest of cash and bonds.
- Strategic Rebalancing. When will you rebalance your investments? What will be your triggers?
- Careful Diversification. What is the right mix of stocks, bonds and cash for you?
- Tax efficiency. Tax efficiency does not just involve the type of investments you hold (ex. tax free bonds vs. taxable bonds), but prioritizing which type of account (ex. Roth IRA vs. Traditional IRA vs. Taxable) to draw income from first based on your tax situation.
- Discipline. Avoid making financial decisions based on emotions.
The truth is, a majority of households in America simply aren’t saving enough to last throughout retirement. In fact, two-thirds of households with at least one working member between the ages of 55 and 64 has a retirement savings of less than one year of their annual income.³ With longer life expectancies and unexpected expenses, that simply won’t last. That’s why it’s more important than ever to focus on how you can make your money work for you throughout retirement.