Conservative Investing In Retirement: The Edward Jones Approach

Retirement planning is a critical step to securing your financial future. The sooner you start to develop a retirement plan, the more time you'll give your retirement accounts to grow. A 2022 study by Edward Jones and Age Wave found that 54% of retirees and pre-retirees over 45 viewed retirement as an exciting new chapter of life. However, without a sound financial strategy and adequate preparation, retirement can present significant challenges. To help you navigate these challenges, Edward Jones offers guidance on how much you should withdraw from your retirement account, recommending a flexible withdrawal rate that aligns with your age, risk tolerance, and goals in retirement. They also suggest reviewing your withdrawal and reliance rates during market volatility, as well as looking for opportunities to rebalance your portfolio.

How to choose a financial advisor

Financial advisors can help you manage your money and reach your financial goals. They can provide a range of financial planning services, from money management and budgeting guidance to investment management.

• Identify your financial needs: Do you need help with budgeting, taxes, or investment advice? Different advisors may specialise in particular areas of finance, so it's important to know what you need help with before beginning your search.
• Understand the types of financial advisors: Financial advisors go by many names, including investment advisors, brokers, certified financial planners, and portfolio managers. Some financial advisors have additional certifications or expertise that allow them to help with complex financial topics.
• Review your options: Financial advisors are available in-person or online. Online financial advisors can be fully automated (robo-advisors) or offer access to human advisors. Traditional financial advisors typically offer the most personalised service but may be more expensive.
• Consider the cost: Financial advisors have a reputation for being costly, but there are options for every budget. Robo-advisors are usually the cheapest option, followed by online financial advisors, and then traditional financial advisors.
• Research the advisor's background: Check the advisor's credentials, experience, and disciplinary history. You can look up their Form ADV, advisory brochures, and certifications. It's also a good idea to verify any claims about their qualifications.
• Hire the financial advisor: Contact your preferred advisor and set up an initial consultation to discuss your financial situation, goals, and ask any questions. A good advisor will explain your options clearly and welcome your questions.

Edward Jones as a Financial Advisor

Edward Jones is a financial services firm that offers a consultative and individualised approach to its clients' financial needs. They provide various account options, allowing clients to choose the approach that works best for them. Edward Jones financial advisors aim to build a lasting relationship with their clients and support them through a custom, long-term strategy. They also offer additional compensation, training, and support to new financial advisors.

Pros and cons of downsizing in retirement

Downsizing in retirement can be a great way to save money and reduce stress. However, there are also some drawbacks to consider before making the move. Here are some pros and cons of downsizing in retirement to help you make an informed decision:

Pros of Downsizing in Retirement:

• Financial benefits: Reducing or eliminating your mortgage, property taxes, and other expenses can free up money for other needs or desires.
• Reduced time and effort: Smaller homes require less time and effort to maintain and upkeep, leaving more time for enjoyable activities and hobbies.
• Increased coziness: A smaller space can create a cozier atmosphere and encourage simpler living and more family connections.
• Energy savings: A smaller home will likely result in lower utility costs, which can help fund your retirement or other personal goals.
• Forced decluttering: Downsizing requires getting rid of unnecessary items, which can be freeing and help shift your focus from accumulating possessions to making memories.
• Diversification of assets: If most of your net worth is tied up in your current home, downsizing allows you to invest the proceeds elsewhere and diversify your portfolio.
• Accessibility: Downsizing to a single-story home or one with fewer stairs can address mobility issues and ensure a safer and more comfortable living space as you age.
• Relocation freedom: Downsizing gives you the option to relocate to a new state or city, allowing you to explore new places and meet new people during retirement.

Cons of Downsizing in Retirement:

• Emotional attachment: Leaving a family home filled with memories can be emotionally challenging.
• Less space and privacy: Downsizing may result in feeling cramped and having less privacy, especially if you are used to a larger home.
• Selling and moving costs: Buying and selling real estate can be expensive, with various fees and costs involved, such as home repairs, inspections, real estate fees, and moving expenses.
• Adjusting to a new community: Moving to a new neighborhood or retirement community can be challenging, especially if most of your friends and family live in your old neighborhood.
• Downsizing possessions: Letting go of possessions that no longer fit in your smaller space can be difficult, especially if they hold sentimental value.
• Limited entertaining space: If you enjoy hosting large gatherings or having guests stay over, a smaller home may not accommodate your needs.
• Rules and restrictions: Some rental properties or retirement communities have rules and restrictions, such as pet policies or homeowners' association (HOA) fees, that may not align with your preferences.
• Lifestyle adjustments: Downsizing often requires adjusting your lifestyle, including how you accumulate possessions, entertain, and spend your free time.

401(k) rollover options

When it comes to 401(k) rollover options, there are a few different avenues you can consider. The first option is to leave your 401(k) with your former employer, provided the account meets a minimum threshold, typically $5,000. While you won't be able to make new contributions, your earnings will remain tax-deferred, and you can preserve the option to roll it over in the future.

The second option is to move your 401(k) to a new employer's plan if you are changing jobs. This option allows you to consolidate your retirement accounts and can help you maintain the lower fees typically associated with an employer 401(k) plan. However, it's important to note that the new employer's plan may differ in terms of investment options, fees, services, and distribution options.

The third option is to roll over your 401(k) to an Individual Retirement Account (IRA). This option provides a broader selection of investment choices and allows you to consolidate all your investment accounts with one provider, making it easier to manage your assets. However, IRAs typically come with higher fees and expenses, and penalty-free withdrawals are generally not allowed until the age of 59 1/2.

Finally, you have the option to cash out your 401(k). However, this option should be approached with caution as it may trigger taxes and an early withdrawal penalty if you are under the age of 59 1/2.

It's important to carefully consider each option and how it aligns with your financial goals and investment strategy. Consulting with a financial advisor can help you make an informed decision and navigate the specific steps involved in the rollover process.

Individual retirement accounts (IRAs)

IRAs are tax-advantaged retirement plans. The two main types of IRAs are traditional IRAs and Roth IRAs. The difference between them is how and when your money is taxed. With a traditional IRA, you save today and are taxed when you withdraw the money. Traditional IRA contribution limits are based on how you file your taxes and typically change each year. For the 2024 tax year, individuals 49 or younger can contribute up to $7,000, and those 50 or older can contribute up to $8,000.

With a Roth IRA, you make contributions on a pretax basis if your income is below a certain threshold and pay taxes when you withdraw the money. Your contributions are not tax-deductible, but any earnings growth is tax-free, and qualified withdrawals are tax and penalty-free. The contribution limits for a Roth IRA are the same as for a traditional IRA, but your ability to contribute phases out at certain income levels.

You can also roll over a 401(k) into a new or existing traditional or Roth IRA.

Inflation risk

Inflation is a key consideration for retirees, and it is one of the top risks to your retirement funds. While a certain amount of inflation is to be expected, it is important to prepare for heightened or prolonged periods of market downturns.

Firstly, it is important to understand your risk tolerance and capacity. Your risk tolerance is your emotional comfort with risk, and your risk capacity is your ability to handle risk. Generally, younger investors can handle more volatility, while retirees are less financially able to withstand market declines. Knowing your risk level can help you avoid emotional investing mistakes, such as chasing performance. Your Edward Jones financial advisor can help you determine your risk level and find the right balance of investments to match it.

To protect against inflation, it is recommended to have a balanced portfolio that includes investments with the potential for rising income. While retirees may be investing more conservatively, it is important to still take on some risk by incorporating growth investments. These can help to counteract the effects of inflation over time.

There are several strategies you can employ to address inflation risk. Firstly, consider a CD/short-term fixed-income ladder, which involves owning a variety of quality fixed-income investments with staggered maturity dates. This can help you avoid selling assets in a down market to cover your income needs. Secondly, review your withdrawal rate regularly, especially during years when the market underperforms. A popular approach is the 4% rule, which suggests withdrawing 4% from your savings in the first year of retirement and then adjusting subsequent withdrawals for inflation. However, this rule has been revised, and some experts now recommend a lower withdrawal rate of 2% to 3% due to ongoing inflation. Finally, consider investing in an annuity, which can provide a lifetime income stream that is not subject to stock market movements.

While inflation is a concern, it is important to remember that your financial strategy is designed with market declines in mind. Your portfolio should contain an appropriate mix of stocks, bonds, and other investments to help you withstand downturns and prevent them from disrupting your long-term financial strategy.

Frequently asked questions