The Investment Strategies That Still Work in Retirement

September 24, 2021

Who says investment ends with retirement? You just need the right strategies to make the most of your money. Here are some of the best.

Who says retirement and investment are mutually exclusive? We often talk about investing as though it cuts off when you retire. You can and should continue to invest as a retiree—especially if you want safety net income outside of savings and Social Security, or if you hope to leave a legacy to your kids.

Here’s a look at the basics of investing as a retiree and the best investment strategies in retirement.

The Basics of Investing as a Retiree

Before you start, though, keep in mind that the rules of investing as a retiree look quite different than they did while you were working. That’s because you no longer have fresh income (a salary) pouring in each month. You’re drawing on what you already have, and it’s not bottomless.

However, your retirement portfolio has to balance two conflicting goals: preserving capital (less risk) and growing capital to protect against inflation (more risk).

For retirees, this involves careful calculus. You can and should try to grow your wealth in retirement, but this should happen through maximum diversification. That reduces volatility risks down to their lowest practicable level while still allowing growth. The other half of your portfolio should be fixed income investments, which provide steady income through interests and dividends (thus functioning as a store of value).

Keep in mind that this is a total return strategy rather than an income strategy, which is quite different from what your parents and grandparents used. Most institutional investors (like university endowments) rely on a total return strategy to insulate the whole portfolio against market volatility.

The Best Investment Strategies in Retirement

What does that look like in action? Here are some investment strategies to keep in mind and assets to consider within your strategy.

Choose Your Approach

First, you need to choose your approach. Most retiree investors choose from three strategies:

  1. Bucket strategy
  2. Cover-the-basics strategy
  3. Interest-only strategy

The bucket strategy is when you split your retirement savings into segments (buckets) based on your retirement stage. The traditional model uses three (early, middle, and late) but these days, advisors often recommend being more granular—you can even split your buckets by five-year segments. This gives you minute control over your investments over time, and it’s easier to be exact (which matters when you don’t have fresh income to recover losses).

The cover-the-basics strategy splits your reliable income (like Social Security or pension disbursements if you’re in the rare job that still has pensions) among your necessities. Your bills should be covered by income you can count on. Any other expense is an extra and can be covered with extra investments. This strategy makes the most sense if you think your retirement income will be fairly low.

The interest-only strategy is exactly what it sounds like: your income is generated solely through interest without income earned from investments or other financial vehicles. It’s a low-risk strategy, but it requires a significant amount of cash up front, and in its pure form, you can’t touch the principal. At all. Ever. The whole point of the principal is to generate income, but it only works if all of the principal is there. This means you need separate funds for things like emergencies or healthcare. This strategy usually only works if you had a high income while you were working.

For most people, the bucket approach or cover-the-basics strategy is the right choice. Both can hold their own pretty well against market volatility. After that, you adjust your risk levels to account for fixed capital and invest based on your strategy and comfort level.

Conservative Mutual Funds

What does that look like in terms of assets? For many investors, your first port of call is a conservative mutual fund. The key word here is conservative.

If you’re new to mutual funds, a mutual fund is a company that pools money from investors and invests the pool to gain returns. When you buy in, you buy shares in the mutual fund and receive your gains as dividends. In general, mutual funds are a safe investment, but some are more conservative than others.

As a retiree, you’re most interested in the conservative funds, which may mean switching away from the mutual fund you used while working into a mutual fund designed for conservative retirement income.

Index Funds and ETFs

That said, don’t neglect index funds and exchange-traded funds in favor of mutual funds. In fact, as a retiree investor, these funds are a great choice for growth with major diversification and relatively low risk.

An index fund is a type of mutual fund or exchange-traded fund that seeks to be the market instead of beating the market. It does this by tracking or matching performance of a particular market index, like the S&P 500, which is an index of the 500 largest publicly traded companies in the U.S. When you buy into an index fund, you buy shares in every company in the fund, which means instant diversification and reduced risk.

An exchange-traded fund (ETF) is a basket of securities that can be traded on the stock exchange like a regular stock, which means they offer the diversification of a mutual fund with the ease of buying and selling stocks. They function a lot like index funds, but with a lower initial investment and better tax efficiency.

Both index funds and ETFs have a few major benefits for retirees: low costs, tax efficiencies, easy cash flow extraction, and easy oversight. This makes them two of the best ways for retirees to invest in stocks.

Make the Most of Your Golden Years

Whether you’re young or old, it pays to invest with the right tools. Investment strategies in retirement rest on diversification and risk management, and that’s where we can help.

Blue-chip art has outperformed the S&P 500 by 180% from 2000 to 2018. And for retirees, blue-chip art investing comes with the benefit of low stock market correlation and strong appreciation, which means you can see gains without eyeing the state of the stock market. Here at Masterworks, we handle the research, authentication, and purchase for you so that you can buy shares in multi-million-dollar art starting at just $20 per share. Ready to build a portfolio that supports your life goals? Fill out your membership application today to learn more.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.