Smart and easy ways to invest money after retirement

How to invest after retirement

How to invest after retirement

Investing during retirement can be something of a catch-22. On the one hand, you want to grow your money. You don’t want to let it languish in an interest-free checking account, even though doing so could cause you to lose value against inflation. On the other hand, you want to keep your money safe. You’re done with work, which means there’s likely no more reliable income with which to replace portfolio losses. Investing in retirement therefore means balancing these two needs. Here are the key issues to consider before choosing specific stocks 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.

Withdrawal rate versus risk approach

Your withdrawal rate—how much you have to withdraw from this account each month—can help inform your risk approach. If you’ve invested in traditional assets like stocks and bonds, most portfolios can recover from short-term losses over time. During 2022, for example, the value of most stock portfolios has dropped significantly. Over the next few years, these investors can likely expect to recoup losses as the market picks up its growth.

What’s different for a retiree is that you don’t always have the time to let those assets sit still. You have to periodically sell assets and make withdrawals because this is the money you will live on.

So for a retired investor, the withdrawal rate is an essential issue when it comes to risk management. The more money you have to withdraw each month, the less flexibility you will have to leave assets alone and recover from losses. Conversely, 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 recession. 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 outstanding during a bear market, the more aggressive you can get with your investments in retirement. Knowing the withdrawal rate will help define that flexibility.

Capital appreciation versus income investment

Broadly speaking, there are two broad approaches to investing as a means of income. The first is capital appreciation investing. In this case, invest in assets that you intend to sell. When assets increase in value, such as when a stock 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 investing. In this case, invest for assets that you intend to own. Such assets then generate payments over time, such as the interest on a bond or the dividend payment of a stock. That yield becomes the source of your personal income, and trade actively to maximize your portfolio payouts over time.

Investing for capital appreciation tends to be a higher risk/reward approach than investing for income. You can make more money, but you have a higher chance of losing. On the other hand, while investing for income is much more reliable than capital appreciation, more money typically needs to be invested to generate significant returns.

For a retiree, investing in income 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 they don’t have enough start-up capital to do so. Annuities are another form of fixed income asset that can be a strong asset for the right portfolio, but may require prior investment to generate significant returns.

Consider the economic environment

How to invest after retirement

How to invest after retirement

Within the broad market, consider the risks of both investing and not investing. Not investing can leave you vulnerable to inflation. For example, leaving your money in something like a savings account can actually lead to significant losses. If you’re earning 1% interest during 7% inflation, you’ve effectively lost six points of value over the course of the year. This may suggest choosing a more aggressive investment option to offset those feeble losses.

Conversely, investing in a bear 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 have to make active withdrawals from their portfolios. So a bear market that might create opportunities for someone who can leave their portfolio alone might not work for someone who needs to sell those assets in 18 months.

Finally, consider your finances and cost of living. Where you live and what you need will go a long way in determining what your wallet needs to achieve. Someone living in Michigan’s Upper Peninsula will need far less money each month than a retiree living in Boston or San Francisco. Plan your portfolio and its investments according to your needs and potentially plan your needs based on what your portfolio can achieve.

Other considerations for retirement investments

There are other considerations you need to be aware of when investing after retirement that may be unique to you or the types of investments you choose. It’s important to find a way to make sure these extra considerations don’t hurt you based on what your investment choices are.

Fiscal Responsibility

Many investors fail to realize that their retirement assets are often taxable. While your withdrawals from a Roth IRA aren’t taxed, nearly all other retirement assets are subject to income and perhaps even capital gains taxes. This 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 dividends and interest payments, you may pay income taxes.

Among other concerns, be sure to factor in taxes as you plan for your overall savings. Your wallet will need to generate enough cash to live comfortably and pay taxes on those withdrawals, so when calculating how much money you’ll need don’t forget to add 15% to 20% more for taxes.

Fixed capital

In addition to your financial portfolio, consider your other capital resources. In particular, many retirees own their own homes. Capital assets can be an additional source of funds should the need arise. How you integrate it into your plan will depend on their nature. Assets that you feel comfortable selling can be a good source of liquidity and can give you a reserve of cash with which to make high-risk investments. Assets you don’t want to sell, like your home, can still serve as an emergency fund.

Employees and heirs

If you have family members and other dependents, you will want to factor their needs into the monthly withdrawal. Front those expenses into your income. Importantly, if you have dependents, you may need to take a more conservative approach to your investments. It’s easier to cut your own lifestyle in case of losses than it is to cut the money someone else depends on.

Beyond that, start by deciding if you want to leave the money. Do you have children, for example? Or are there any organizations you would like to support? All of this will help determine how you want to manage your investments and withdrawals. The more money you need for active dependents, the more money you will need each month. The more money you want to leave, the more wealth you will have to accumulate and maintain.

The bottom line

How to invest after retirement

How to invest after retirement

Investing shouldn’t stop just because you’ve retired, but your strategy should probably change. Once you’ve stopped working, it’s time to start building plans about how much financial flexibility you have, what your goals are, and what kind of risk you can take now that there’s no new money on the way. Make sure you choose investments that help your overall financial goals.

Tips for investing

  • It’s really important to consider the fact that you don’t have to do anything yourself. You can work with a financial advisor who can help you 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 difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.

  • Many advisers suggest that retirees should focus entirely on safe assets like bonds and banking products. It’s not a bad approach for the money you need, but you don’t have to eliminate the risk altogether. Just be sure to keep your actual income safe as you invest in retirement.

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