Three Tried and True Rules for Investing After Retirement

October 19, 2021

Just as no two people are alike, no two retirements are alike either. Maybe you have grand plans to travel the world or finally purchase that dream property somewhere exotic. Or maybe your plans are a little more down to earth. Whatever the case, you need to plan in advance — and know where you’re headed — in order to make your retirement dreams come true.

Whatever the case, also know that the retirement planning and investing process doesn’t end when you retire. In many ways, that’s when it just gets started.

But investing as a retiree is a whole new world and is very different from investing when you’re younger. There are all sorts of factors that need to be considered, most importantly risk/reward ratio.

Rules for investment after retirement

There’s a lot to know when it comes to investing during your retirement years. Here are some tips and rules to keep in mind to protect your nest egg while still making your money work for you.

Be mindful of risk: After years of chasing high risk returns, it can be hard for retirees to lower their risk appetite. But one of the worst things that retirees can do is to continue to chase returns while taking on high amounts of risk.

While bigger returns are always enticing, time isn’t on your side. As a retiree, there’s no time to make up for significant losses. In the past, you could afford to make risky decisions, but your retirement years are more suitable for managing (and lowering!) your risk levels.

Maximizing returns throughout your lifetime relies on proper risk management so that you can avoid significant short-term losses.

Plan for inflation: Retirees not only face the risk of portfolio declines, but the risk of running out of money as well. While inflation is relatively low today, this may not be the case years from now. This is why it’s important that your money keeps up with inflation.

To protect your assets against inflation, keep a diversified portfolio. Embrace equities along with safe and growth-oriented investments.

Be happy with a happy medium: Retirees face more risk than ever, which is why it’s important to find a happy medium. Aim for “just right” investing, which means not investing for a higher rate of return than what’s needed. If you’re earning an average return of 10%, why invest for anything higher?

But this doesn’t mean that you can’t continue to grow your money. Set aside the funds you need for retirement. If you have any left over, focus on growing them so that you can absorb some risk without risking future financial security.

Create a drawdown strategy

One of the challenges retirees face when investing money is moving past an accumulation mindset and switching to a preservation mindset. Unlike in your earlier years, your current investment objective should be to make the most of your retirement investments and the income streams that you have.

To embrace a preservation mindset, you must have a drawdown strategy. To increase the expected lifetime value of your retirement savings:

  • Use them tax-efficiently
  • Optimize your Social Security claiming strategy
  • Create a budget
  • Minimize overspending

Having a plan may allow you to significantly increase the lifetime value of your benefits. There’s nothing better than not having financial worries during your golden years.

3 investment strategies for retirees

Approaching your portfolio after retiring is much different, especially because you’re no longer collecting a paycheck. Without a steady paycheck, it’s impossible to earn back your nest egg. This means that it’s crucial to invest not only wisely, but safely.

The good news is that unless you grossly neglected your investments, or if you retired spur of the moment, you shouldn’t have to make too drastic of changes to your portfolio.

Here are three strategies to keep in mind to make your money last throughout your retirement years.

Use the bucket approach

The bucket approach is one of the most popular investing strategies for retirees. It’s recommended by top names in the retirement industries, including Dave Ramsey. The idea behind the bucket approach is setting up your total investments in three separate accounts. Each account contains different investments and are used to provide cash flow as well as growth.

The first account should consist of very short-term bonds and money market investments. This account serves to provide cash for your living expenses. Chances are that this account will be depleted within a few years.

The second account includes longer-term bonds that have maturities of five years or less along with stocks from income-producing sectors. This account will be used to produce cash that will refill the first account.

The third and final account should include high-yield bonds and stocks for growth. This account is designed to produce returns that will keep your nest egg growing, even as you spend down the other two accounts. For best results, invest in a diversified mix of stocks and bonds.

The bucket system approach provides the cash you need to pay for living expenses while also shielding you against inflation and market crashes.

Consider real assets

Real assets offer several benefits for retirees. They not only allow you to diversify your portfolio, they serve as inflation protection for years to come. Some of the top real assets to consider include:

  • Infrastructure
  • REITs
  • Natural resource equities
  • Commodities
  • Alternative investments like art

All of these real assets are beneficial in that they provide portfolio diversification, inflation protection, and long-term return potential. Real assets typically perform well, especially when stocks and bonds are both underperforming.

To get the best results, invest across several real asset classes. This enables you to navigate trade-offs more effectively.

Consider preferred securities

Like real assets, preferred securities also offer great benefits for retirees. For a more balanced fixed income portfolio, pair high-yield bonds, or municipal bonds, with preferred securities. This lowers your exposure to various types of risk.

Preferred securities provide the characteristics of stocks and bonds with some security. With preferred securities, investors are paid more for:

  • General complexity
  • Subordination
  • The possibility of payments being omitted or deferred

Because most preferred securities are treated as qualified dividend income, they’re taxed at a much lower rate of 20% versus 37%.

Your retirement years should be nothing short of enjoyable. Make use of all the saving and managing you’ve done over the last few years by following these rules and investing strategies. The idea is to use your nest egg to provide the retirement that you want and deserve while also making it last for decades to come.

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