Should You Invest After Retirement?

October 8, 2021

Retirement and investing aren’t mutually exclusive. After all, you still need your money to work hard. Here’s a look at how to invest when retired.

In investing, a lot of dialogue talks about investing and retirement as if they’re mutually exclusive concepts. It’s so commonplace that it’s baked into our investing mindset and the way we talk about investing—investing for retirement, for example, as if investing stops as soon as you throw your retirement party.

The thing is, you still need your money to work hard in retirement. Inflation doesn’t retire when you do—in fact, it will only get worse the longer you’re in retirement. We don’t know for sure what prices will be in the future, but one way or another, they’re going up. Inflation in recent years has run below the Fed’s average of 2%, but the average inflation rate over the past century is 3.22%. Think about that. Prices have gone up 3.22% on average every year for the past century.

Even so, you’re not earning income in retirement, which means you can’t make up losses easily. So should you invest after retirement, and if so, how should you invest when you retire? Here’s what retirees need to know.

The Importance of Investing After Retirement

The short answer: yes, you should invest after retirement.

The slightly longer answer: you should invest after retirement, but not the way you did before.

The truth is, you still need your money to grow in retirement. Life expectancy is now higher than it was when 65 became the retirement age. Back in 1965, when Medicare was established and 65 was set as the enrollment age (and thus the de facto retirement age) the average life expectancy was 70.11 years. In 2020, the average life expectancy was 78.81 years. Keep in mind that’s the average—many people live even longer.

To put it another way, retiring in 1965 at 65, when the average life expectancy was around 70, meant you only needed to live on your savings for about five years, maybe as high as 10. If you retire at 65 in 2020, you need your retirement savings to last at least three times as long as they did in 1965, and you’re dealing with a much higher cost of living than 1965.

In plain English? It’s time to leave behind the conventional wisdom about investing and retirement as mutually exclusive concepts.

How to Invest When Retired

However, even if you continue investing well into retirement, that does not mean you’re going to break out the investment strategies you had in your 20s—or even in your 50s, for that matter.

The key difference between retirement and pre-retirement is that you give up your primary income source in retirement. That means you don’t have new income flowing in every month, and you’re relying on savings to cover expenses.

Because of this, your foremost concern is capital preservation, not growth. You can still try to achieve growth, especially if you’re hoping to leave a legacy for your kids and grandkids, but this should happen around the margins.

Here are a few steps to help plan investment during your golden years.

Figure Out Your Strategy

First, you need to figure out your asset allocation strategy. For most retirees, that means either the bucket strategy or the cover the basics strategy.

The bucket strategy is when you divide your assets into various “buckets” based on retirement stages. There are typically three: early, middle, and late retirement. As the names imply, each bucket will be used in its respective stage of retirement.

The cover-the-basics strategy aims to match fixed expenses with fixed income sources like Social Security or immediate annuities. The remainder of your assets can be invested to cover non-necessities like travel.

Whatever strategy you choose, you have to start by figuring out your monthly expenses. Be realistic in this calculation. This will help you figure out the gap between what you have saved and the income you’ll actually need to pay the bills.

Break Retirement into Five-Year Segments

If you were paying attention to the bucket strategy, you’ll notice that it has a unique flaw: it talks about retirement in three distinct stages, and it’s rather difficult, if not impossible, to plan for the needs of a 30-year retirement. That wasn’t an issue when the bucket strategy was devised, but these days, with realistic odds of living until you’re 90, it’s a serious concern.

A more temperate approach is to break retirement into five-year segments based on your age. Each of these five-year segments has its own lifestyle needs and it’s own retirement needs.

When you look at these segments, approach them as a microcosm of your lifelong retirement investing strategy. In other words, money you’ll need in the first two or three five-year segments should be invested more conservatively since you won’t have time to make it up, but money you use in the third through fifth segments (year 11 to year 25) have more time to grow.

Pay Attention to Risk

Above all, pay careful attention to your risk level.

You don’t need to cut risk out of your portfolio the moment you file for retirement—you won’t have any growth if you do. However, you should always operate with far less risk than you did in previous years. This also means swallowing the impulse to chase potentially larger returns. You just won’t have enough time to make them up.

Invest in What You Love to Build Your Financial Future

Figuring out how to invest when retired is the art of balancing risk—with an eye toward your decline in income. But that doesn’t mean you can’t invest in what you love, or that you can’t make investments now that will pay off in your retirement years.

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