Saving for retirement is hard. However, when you are still working, creating a retirement investment plan can be relatively straightforward. The goal is to simply grow the money.
But, when you retire, your investment goals become multi-faceted, layered, and downright complicated.
You still want your money to grow, but you have a whole lot of other factors to consider.
Competing Retirement Investing Goals
Just like when you were working, a decent return on investment is important after you retire. However, here is a look at six competing priorities you need to balance for a solid retirement investment plan.
1. Return on Investment and Inflation
So, let’s say that as you retire, you want to minimize the risks to your savings. If you have saved up enough money, why not just convert the assets to cash and sit pretty?
There are many reasons, but the most important is: Inflation.
To retain your buying power, you need your money to earn a rate of return that is at least equal to the rate of inflation.
For example: if you are earning a 3% rate of return on your savings and inflation is at 3%, then your real rate of return is 0%. The purchasing power of your money has remained flat. Even though you earned money, you can not buy more now than before.
(Note: the average inflation rate from 1983 to 2019 was 2.63%, and the average from 2010 to 2020 was 1.83%. To date in 2021, the annual inflation rate is 5.4%.)
2. Short Term Withdrawals and Long Term Growth
In retirement, you are likely withdrawing from savings and investments to help fund your expenses. So, you probably don’t want that money in risky investments that might lose value just when you need to make a withdrawal. However, you do need and want your money to earn returns.
That is why many retirees turn to a bucket investment strategy — invest different buckets of money each with more or less risk associated with them. Keep money you need for short term spending in low risk vehicles and money for long term growth can be invested for more risk.
You may also want to explore 28 retirement investing tips from today’s financial geniuses.
3. Making Your Money Last as Long as You Do
It is not just a matter of investing your money, you need it to last as long as you do — no matter how long that turns out to be.
According to the Social Security Administration: A man aged 65 today can expect to live on average to age 84.2 and a woman aged 65 can expect to live on average to age 86.7.
Planning for these longer life expectancies can put a strain on your retirement financial resources, especially your investment accounts, such as IRAs and taxable brokerage accounts. And, it can be confusing to know how much you can safely spend. If you live longer, you can use less of your savings every year. If you won’t live for very long, you can spend a lot more each year.
The amount you can safely withdraw from savings, while ensuring that you won’t run out of savings, will vary depending on your investment returns, inflation, how long you will live, and much more.
The NewRetirement planner lets you easily see when you might run out of savings. And, every change you make to your financial profile will tell you exactly how you impacted that out of savings age.
Plus, NewRetirement Planner’s Monte Carlo simulation enables you see the probability that your money will last.
The shaded blue area is the result of running your optimistic and pessimistic inflation assumptions a thousand times through a set of variables that can change the outcome. The result is the likelihood that your inflation-adjusted savings will reach your goals at the right time. In this scenario above, the most likely pessimistic assumption may put your savings below the baseline necessary to support your lifestyle in retirement.
HOW TO ACCESS MONTE CARLO SIMULATIONS: To run Monte Carlo simulations on your plan, start by becoming a PlannerPlus subscriber. PlannerPlus gives you access to advanced planning tools and more comprehensive inputs for more wealth and security. You can sign up with NO RISK for a 14 day FREE trial — no charges until after that time.
RETIREMENT WITHDRAWALS: You will also benefit from using the retirement withdrawals tool inside of the Planner. You will be able to 1) Analyze how much you need to withdraw from savings each year to meet expenses 2) Specify a fixed percentage withdrawal and 3) See your maximum withdrawals.
4. Minimizing Taxes
Taxes can be a major expense during retirement. Withdrawals from traditional IRAs, 401(k)s, and other retirement accounts will be subject to income taxes at your highest marginal rate.
For example, if you have $1 million in a traditional IRA, your actual spendable cash from that account might only be $700,000 or so depending upon your tax bracket.
At age 72, you are required to take distributions from your various retirement accounts (except for a Roth IRA) called required minimum distributions (RMDs). This is an effort by the government to recoup the taxes that you didn’t pay on the contributions to these accounts over your working life.
Add to this taxes on most pensions for those who have them, annuity distributions or monthly payments and potentially on a portion of your social security, it’s conceivable that your tax rate may be as high during retirement as when you were working.
One of the biggest decisions that retirees need to make concerning their investments is when to take withdrawals, form which accounts, and in what order. This has implications across a wide range of investment issues, perhaps the biggest being taxes. It can make sense to consider a Roth conversion with some or all of your IRA assets prior to the onset of RMDs, especially if your income has dropped in your 60s. For those still working, who have a pension or other income distribution planning is vital.
The NewRetirement Planner plan inspector lets you estimate your tax burden year-over-year to see where you can expect the biggest tax hits and how to avoid them.
5. Trying to Leave an Estate
Some retirees feel that leaving an estate is a priority. Perhaps you want to benefit heirs such as a spouse, children, or grandchildren. Or perhaps your intentions are charitable.
Leaving a financial legacy can be a valid investing goal. Note that an estate can come in many forms, not just cash or investments. Your estate might include real estate such as your home, other property, or items of value.
Make sure your estate plans are up to date, consult Estate Planning: 11 Documents You Need for Coronavirus and Always.
6. Other Priorities
Besides funding retirement, many retirees also want their money to fund children’s or grandchildren’s education or charitable causes.
Using money to reflect your values can help lend meaning to your year’s of saving and investing and to your life in retirement.
These priorities can be balanced, but you should first make sure that your own spending needs (if not wants) are covered first.
Tips for Achieving All of Your Competing Retirement Investment Goals
Here are a few tips for a solid retirement investment plan that can help you achieve all of your retirement investment goals:
While retirees need to be mindful of the level of risk they are taking with their investments, they need growth to stay ahead of inflation and to help ensure they don’t outlive their money. This means an allocation to stocks that balances this need for growth with minimizing downside risk. Regarding risk, retirees just don’t have the time to make up for out-sized losses as would someone in their 30s or 40s.
The days of a portfolio of bonds and CDs only are long-gone. Dividend-paying stocks can be a means to produce a consistent stream of income, but investors need to understand that these are still stocks and carry the risks inherent in investing in stocks.
Try a Bucket Plan
Investors should consider a “bucket approach,” which means having certain portions of their portfolio set aside for cash needs for a set period of time (perhaps 1-3 years-worth of cash needs), and then buckets for intermediate growth and income as well as one for longer-term growth. The latter bucket would largely consist of stocks, the middle bucket might consist of a combination of fixed income and income procuring stocks. Everyone’s situation will be a bit different, however.
Explore different types of bucket strategies and use the NewRetirement Planner to help you assess whether or not one would be right for you.
Plan for Retirement Income, not Just Investments
“The most important thing you can do for your retirement is have a plan, specifically a retirement income plan. A plan covers far more than what investments to pick. Investments are the last part of the plan; the icing on the cake. They should come only after you have the main meal menu in place, and the cake baked,” says Dana Anspach, founder and CEO of Sensible Money LLC (and one of MarketWatch’s RetireMentors).
To learn more, read “How to Build a Retirement Income Plan” for insightful tips.
Have a Retirement Investment Plan and Keep it Updated
Investing during retirement is complicated and is a juggling act between achieving enough growth to ensure your money lasts, managing your tax hit and controlling downside risk. Planning and regular reviews of your portfolio and your overall situation are a must to help ensure financial success in retirement.
A good online retirement planner can also help you set up a good initial retirement investment plan as well as keep tabs on how well you are managing your resources.
Get Reassurances from Reliable Professional Advice
Many of us struggle to keep up with our investments when the only goal is to grow the money. Because things get so much more complicated in retirement, you may want to seriously consider using a financial advisor. NewRetirement can match you to a prescreened licensed professional that has expertise in post-retirement investing and balancing these competing priorities.
Years ago talking to a financial planner could be intimidating and confusing. But since the coming of digital technology and communications, getting quality, dependable advice without sales pitches has become easy and inexpensive.