6 Competing Priorities That Complicate Your Retirement Investment Plan
Saving for retirement is hard. However, when you are still working, creating a retirement investment plan can be seem 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 should take less risk. Plus, you have a whole lot of other factors to consider.
Here is a look at six competing priorities you need to balance for a solid retirement investment plan.
1. Return on Investment and Risk
Just like when you were working, a decent return on investment is important after you retire.
However, you probably should not take as much risk in order to get higher returns. When you are young, you are investing for the future. Therefore, you have time to make up for losses you might incur. When you are older, you need the money to be available and you simply don’t have as much time to recover from a downturn.
The NewRetirement Planner lets you run different scenarios to see the impact of various rates of return.
2. 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, including the very good reason: 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.
To illustrate how devastating inflation can be, let’s look at the impact of 3% annual inflation on your spending power. Note 3% is around the long-term historical norm.
Using the rule of 72, an annual rate of inflation at 3% will cut your spending power in half over a 24-year period. For someone retiring at 65, this would occur by age 89. With longer life expectancies retirees should put the risk of inflation at the top of their list of retirement concerns.
3. How to Make Your Money Last as Long as You Do
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 let’s 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.
However, rather than relying on drawdowns to fund retirement, you might want to maximize your income from other sources, especially lifetime income sources:
- Get the most out of Social Security. Try a Social Security calculator to figure out when that might be. This income will last as long as you live.
- Consider converting savings to a lifetime annuity. Use an annuity calculator to find out how much lifetime income you can buy.
- Some retirees may work during a portion of their retirement years as well. Have you considered the pros and cons of a retirement job as a way to minimize drawdowns?
- Many retirees also turn to their home equity as a way to improve their overall financial resources. You can downsize to release home equity to use for retirement expenses. Many retirees get a reverse mortgage when they want to remain in their existing home while tapping into their equity.
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.
5. Trying to Leave an Estate
Some retirees feel that leaving an estate is a priority. Perhaps they 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. Life insurance is another common way to build an estate.
6. Don’t Forget Healthcare Costs
Although it’s a part of the inflation discussion above, the cost of healthcare in retirement deserves its own mention.
In Fidelity’s most recent study, they pegged the cost of healthcare during retirement for a couple both aged 65 at about $285,000.
It’s important that your investment strategy takes into account the need to cover this ever-increasing cost component of everyone’s retirement.
How to Pull Competing Retirement Investment Priorities Together
Looking at all of these and other issues, how does this impact your retirement investment strategy? Here are a few thoughts.
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 whether or not one would be right for you.
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.
Consider 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.