Thinking of Retiring?

Here are Some Investment Tips for Retirees

While each of these suggestions will serve retirees and those planning to retire well, they also apply equally to younger investors. If implemented early, these tips can lay a strong foundation for growing wealth at any stage in life and set you up to enjoy your golden years.

Anticipate your spending in retirement: For most, retirement means living on a reduced income. Retirees can expect to spend between 55% and 80% of their annual income throughout retirement. A more active lifestyle will require additional income. The reason for needing less income in retirement is because you will likely spend differently, some of your income during your working years went to retirement, which isn’t necessary anymore, and your taxes will be lower.

Retirees can expect to spend the bulk of their money in five categories: housing, healthcare, transportation, food, and entertainment, while spending less on insurance and taxes.

As noted by RetireGuide:

  • People ages 65 and older had an average income of $55,335 in 2021.
  • Average annual expenses for people ages 65 and older totaled $52,141 in 2021.
  • 48% of retirees surveyed reported spending less than $2,000 a month in 2022.
  • 1 in 3 retirees reported spending between $2,000 and $3,999 per month.
  • 18% reported spending more than $3,999 per month.

With a fixed income, you should avoid large purchases and carefully consider whether the expense aligns with your long-term financial plan.

Assess your risk tolerance: In each stage of life, your portfolio will require a different approach as your financial needs change over time. As you begin thinking about retirement, your risk tolerance may decline. The older you are, the less likely you will be able to withstand significant losses because you have less time ahead of you to recoup those losses. To assess your risk tolerance, some things to consider include your investment goals, financial needs, time horizon, lifestyle, amount of time you are willing to commit to oversee your investments, and comfort level with market volatility.

Make sure you have an emergency fund:  Less than half of all Americans have enough emergency savings on hand to cover three months’ worth of non-discretionary expenses, according to data from a 2023 Bankrate emergency savings report. Financial advisors recommend individuals have at least three months of expenses saved for emergencies, like job loss or unexpected medical bills. Your emergency fund should be sitting in readily accessible savings or money market accounts. This ensures you have cash available for unexpected expenses or downturns in the market, allowing you to avoid selling investments at unfavorable times.

Diversify your portfolio: By spreading your investments across different asset classes and industries, diversification enables you to reduce the risk and volatility of your portfolio over time. With diversification, you can offset investments that are losing money with other investments that are over-performing or producing returns closer to their historic averages.

Consider allocating your investments across stocks, bonds, bank CDs, real estate, and alternative investments to achieve a balanced portfolio. An article by The Motley Fool recommends owning at least 25 different companies from a variety of industries, or investing in an index fund, which offers instant diversification. Consider both short-term and long-term investments, in companies of varying sizes and industries that cross multiple geographic regions.

Diversification does not ensure profit or guarantee against loss, but it can reduce the number and severity of ups and downs that your portfolio will experience over the years. Remember to rebalance your portfolio periodically to ensure it continues to serve your needs as you journey through retirement.

Consider income generating investments: Retirees often rely on investment income to cover living expenses. In addition to generating consistent, stable income over time, these investments often require medium- to low levels of involvement. Some of these investments include dividend-paying stocks, bonds, annuities, or real estate investment trusts (REITs).

High-yield investments often carry excessive risk. Be cautious of these investments at any stage in life.

Aim for tax efficiency in your portfolio: Taxes can significantly reduce the returns that you receive on your investments and this can potentially jeopardize your long-term goals. Knowing in advance when you will need to access your money can guide you on what type of account you should hold your assets in.

In tax-deferred accounts, such as traditional IRAs and 401(k)s, the income your investment generates remains sheltered from taxation as long as it is in the account. For traditional IRAs, your money can sit in the account without tax liability until you turn 73, at which age you are required to start taking the minimum distributions. Investing in a Roth IRA at a younger age has significant benefits. While you are investing after-tax dollars and taking an up-front hit, your earnings and withdrawals are not taxed in retirement and provide the potential to compound tax-free funds over your working years. Tax-exempt investments, such as municipal bonds, do not incur federal tax liability even when you withdraw your money.

Plan for inflation: Over time, inflation erodes purchasing power. Financial advisors suggest holding equities in your portfolio to offset inflation. According to research from Hartford Funds, from March 1973 to December 2020, U.S equities exceeded the rates of inflation 76% of the time when inflation was above 3% and on a downward trend. Retirees should consider investing in assets that have the potential to outpace inflation, such as stocks, real estate, or Treasury Inflation-Protected Securities (TIPS). This helps protect your retirement income against the rising cost of living.

Seek professional advice: Keep up with financial news, market trends, and investment options. Educate yourself about different investment strategies and understand the risks involved. Consider consulting with a trusted financial advisor who can provide personalized guidance tailored to your retirement goals.

Investing involves risks, and no investment strategy can guarantee success. The information provided here is for general purposes and should not be considered as legal, financial, or investment advice. If you are interested in putting your retirement plan in order you should seek the advice of certified financial advisor.

– written by Lauren Levi

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