Retirement planning may look like the well-known three-step process – working, saving, and retiring. But there is another vital step to consider to ensure an effective retirement plan and a smooth retirement: maintaining the longevity of your retirement fund while securing a regular income.
There are various challenges that current investors face while planning for retirement. First among them is the general increase in the average life expectancy – one should make sure that one has enough retirement savings to outlive it. The second is that one cannot rely solely on fixed income securities like bonds etc to fund their post-retirement expenses. And lastly, the rising cost of medical goods and services, where more often than not, a big chunk of one’s retirement fund is spent. Hence, investing after retirement has become crucial. For a further understanding of wise investment strategies to implement post-retirement, consult a financial advisor for suitable investment advice based on your unique financial requirements.
Factors to consider while finding suitable investments post-retirement
Now that we understand how necessary it is to invest after retirement, let us look at factors to keep in mind before investing:
1. Be wary of risky investments
Risk-averse investors are accustomed to investing for growth, due to which higher weightage is given to high return high-risk assets such as equity and related funds in their portfolios. Even though investing in such assets may seem enticing, post-retirement investors should be mindful of the risk they carry. Since people no longer have a direct regular income after they retire, it is not wise on their part to jeopardize a steady income by exposing their retirement savings to market risks and swings. In the case of retirees, they can create a conservative portfolio specifically to provide income at regular intervals. Thus, an appropriately diversified portfolio is the key to gaining maximum returns for an extended period while limiting risk.
2. Consider inflation risk
Inflation risk loosely assists to a decline in purchasing power associated with a certain sum of cash over the years. This risk should not be overlooked. Retirees need to keep their portfolios in line with high -low tides of inflation. There is a higher chance that retirees may run out of their investment funds if they fail to beat inflation. Thus it is advised to have some part of the portfolio investment in growth-oriented risk-averse assets.
3. Ensure you break down the retirement into segments
No one-time plan can cater to a 25-30-year retirement. Therefore, you should break your retirement income targets according to different segments. Money should be invested more conservatively in the first few segments. The focus of the portfolio can be shifted to growth in the latter half of retirement.
Sources of reliable income post-retirement
1. Retirement accounts and pensions
Retirement accounts like 401(k) and 403(b) are standard methods that retirees resort to for retirement income. Employers offer both these accounts – 401(k) is provided by public companies, whereas 403(b) is provided by no-profit organizations. Investment options offered by 401(k) are more significant than that of 403(b). They include not only mutual funds and annuities but also ETFs and index funds. Some retirees are also fortunate to have a defined benefit pension plan sponsored and managed by the employer and provide pre-specified income at fixed intervals.
2. Immediate fixed annuities
If you wish to have certainty of income that mimics a Pension or Social Security benefit, you can opt for immediate fixed annuities. Fixed annuities are a kind of insurance contract that promises to pay a specific amount/interest depending on the contributions made by the contract holder. ‘Immediate’ fixed annuities are simply the annuities that start providing you the specified interest shortly after you purchase the contract. These contracts can last for a specific period or all your remaining years.
The advantages of annuity are the predictability of income flow, tax benefits, and easy risk management. Even though these fixed annuities might seem pretty much risk-free, they do carry some types of risks. First is the inflation risk. The interest provided by this asset often cannot beat inflation and thus eats out the purchasing power of the account holder. The second risk is that the sum you pay to purchase the annuity might not be worth compared to your income against the same. The account holder might assume that he has 30 years in retirement and purchase the annuity accordingly, but he might not live that long due to unforeseen circumstances. So, the benefit accrued is lesser than the cost of the annuity.
Since fixed annuities are expensive to purchase, it is suggested to compare and look for other investment options.
3. Systematic withdrawal plans
Unlike annuities, you can access the principal under a systematic withdrawal plan. These plans are usually associated with annuities, mutual funds, and even brokerage accounts. Additionally, you can control the amount and the time interval of the income payments. The benefit of this type of investment schedule is that you can make full use of your retirement contributions. Instead of being limited to fixed payments in every interval, you can get the amount of your choice in case of any need. The only disadvantage is that you might deplete your retirement savings early on.
A bond is a debt/fixed income instrument. The buyer of the bond can expect a fixed interest payment from the borrower. Retirees largely Included bonds in their portfolios to attain diversification as bond interest payments can guarantee regular income if markets are down or highly volatile.
One of the advantages of investing in bonds is that you can get all your principal back if you hold the bond till its maturity. Regular and steady interest income are the other benefits. But, one must note that even bonds relatively carry default risk; thus, retirees should make sure that they buy government agency bonds and bonds of companies with sound financials.
A balance in risk and return is crucial as high-yield bonds carry a higher risk of default, and high-quality bonds pay lower yields. A clever way to invest in bonds is to create a portfolio that includes bonds that mature at different dates according to the financial goals of the retiree and thus will provide funds to the bond-holder as and when required.
5. Dividend-paying stocks and dividend income funds
Purchasing stocks means buying a stake in the ownership of a company. Retirees can invest in stocks for the growth of their portfolio as well as regular cash inflows in the form of dividends(that is paid against the stock in proportion to holdings). It is well known that stocks carry a high level of risk, and thus, one can opt for Dividend Income Funds. These funds include dividend-paying stocks, but managers manage them on your behalf. Investing in companies that provide qualified dividends (which incur a lower tax rate than other income) may also prove beneficial. Retirees can invest in this type of investment depending on their risk tolerance.
6. Real estate
There are different methods to invest in real estate. You can invest in income-producing/rental real estate or Real Estate Investment Trusts (REITs). As the name suggests, rental real estate will provide rent which can be a stable source of income after retirement. Thus giving your existing property on rent or investing in a rental property can be an excellent option to get steady cash inflows. The downsides are that you incur property tax and additional costs to maintain the property. You should factor in variables such as vacancy rate and upkeep costs and do the cost-benefit analysis accordingly.
Real Estate Investment Trusts fall on the similar lines of investing in a mutual fund that owns real estate. A team of professionals performs all functions associated with managing the property, such as paying expenses, collecting rent, collecting management fees, and distributing the excess income to the investors. You can access the REITs on exchanges as well. They accrue a substantial amount of monthly and quarterly dividends and hence can be a good investment when it is included as a part of a diversified portfolio. They do possess high risk and should be used appropriately.
7. Savings accounts and certificate of deposit
Investing in such accounts and vehicles is the safest bet when in doubt. Government agencies safeguard FDIC-insured accounts in the event of a bank failure. Banks offer interest payments against Certificate of Deposits. Often the returns on these investments are not that high. They usually carry a 2% interest rate, but they are largely risk-averse and can be attractive investment destinations if the rates rise.
8. Income from part-time jobs
Working part-time is a good way for retirees to stay active and busy during their retirement days. Retirees can become part-time teachers/professors at an institute or get involved in part-time/ short-term gigs. They can also convert their hobby into a money-making business like painting, pottery, putting up a plant nursery, sewing, etc. This option is a sure-shot way of earning some extra regular income with zero risk.
Retirement, in the dynamic world, cannot be limited to traditional planning. Today, retirement needs cannot be alone met by fixed income streams and others. To look out for emergencies and any other personal wishes/commitments, a person can take the chance to earn additional returns by making the right investment decisions. Also, one should also not entirely rely on retirement savings to cover up for the duration of their retirement. Hence, to get suitable returns, investors should consider all the above factors to find the appropriate investment products and allocate funds in the chosen assets according to their personal risk-return preferences.
Connect with a qualified financial fiduciary to effectively plan for your retirement. Use Paladin Registry’s free advisor match tool, answer a few questions, and get matched with 1-3 fiduciaries suited to meet your unique financial needs. You may also set up a free initial consultation with them before deciding to hire one.
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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice. A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.