Retirement Investing: A Wise Move Or Misguided Adventure?

Investing after retirement is a wise move to ensure your retirement savings last. It's important to have a clear plan for how you can afford to live on a fixed income and understand where and how your cash is invested. While it's crucial to have a balanced portfolio of stocks, bonds, and cash investments, it's also good to have more accessible savings in a high-yield savings account.

There are several investment options to help generate retirement income, including income annuities, diversified bond portfolios, total return investment approaches, and income-producing equities. A financial professional can help determine the most appropriate strategy for your circumstances.

Calculate your net worth

Investing after retirement is a wise option to ensure that your retirement savings last. It is important to calculate your net worth to understand your financial health and make informed investment decisions. Net worth is the value of all your assets minus your liabilities. Here is a step-by-step guide to calculating your net worth:

• Identify your assets: Assets are valuable possessions that you own. This includes cash, such as money in your checking and savings accounts, retirement accounts, investment accounts, and any other sources of income. It also includes physical assets like your house, vehicles, and other properties. If you are willing to sell certain assets, such as your home or car, you can include them in your net worth calculation.
• Determine your liabilities: Liabilities are financial debts or obligations that deplete your resources. This includes loans, mortgages, credit card debt, accounts payable, and any other money owed to another person or entity. If you are using your home or car as an asset, their respective mortgages or loans also count as liabilities.
• Calculate the difference: Subtract your total liabilities from your total assets. The resulting amount is your net worth. A positive net worth indicates that your assets exceed your liabilities, which is a sign of good financial health. A negative net worth indicates that your liabilities exceed your assets, which may be a cause for concern.

It is important to note that your income is not included in the net worth calculation. Net worth is a measure of your financial position at a specific point in time and can change as your assets and liabilities fluctuate.

Once you have calculated your net worth, you can use this information to make informed investment decisions. Consulting a financial advisor is a good idea to ensure you are optimising your investment strategy and making the right choices for your needs. They can help you assess your risk tolerance, diversify your portfolio, and plan for the long term.

Understand your retirement account options

There are several retirement account options to choose from, each with its own set of advantages and disadvantages. Here are some of the most common types of retirement plans:

• Defined contribution plans: These are currently the most common type of workplace retirement plan. Examples include 401(k)s, 403(b)s, and 457(b) plans. The main advantage of defined contribution plans is that they are relatively easy to set up and maintain, and employees can often contribute through automatic payroll deductions. Additionally, employers may match a portion of the employee's contribution. However, investment choices within these plans are often limited, and management and administrative fees can be high.
• Individual retirement accounts (IRAs): IRAs are one of the most common retirement plans and can be set up at financial institutions like banks or brokerage firms. IRAs offer a wide range of investment choices, and individuals can decide how and when they get a tax break. However, IRAs have lower annual contribution limits than most workplace retirement accounts.
• Retirement plans for small-business owners and self-employed individuals: These include plans such as the SEP IRA, solo 401(k), SIMPLE IRA, and profit-sharing plans. These plans have higher contribution limits than most employer plans and IRAs, and they often offer more investment choices. However, setup and administrative duties can fall on the employer, and early withdrawal options may be more limited.
• Traditional pensions: These are a type of defined benefit plan that is becoming less common. Pensions are fully funded by employers and provide a fixed monthly benefit to retirees. While they offer a predictable retirement benefit and require little management from employees, they are becoming less common due to the high cost for employers.
• Guaranteed income annuities (GIAs): GIAs are typically purchased by individuals to create their own pensions. They can be bought on a tax-deferred basis or with after-tax money, and they provide a guaranteed income stream for life. However, they may not be suitable for those who are unsure about their retirement plans, as they lock you into a specific strategy.
• The Federal Thrift Savings Plan (TSP): The TSP is similar to a 401(k) plan but is only available to government workers and members of the uniformed services. It offers low-cost investment options and generous employer contributions, making it an attractive option for those who are eligible.

When deciding which retirement account option to choose, it's important to consider factors such as contribution limits, investment choices, tax advantages, and the level of control you have over your investments. Additionally, if you have access to an employer-sponsored plan with matching contributions, it's generally a good idea to take advantage of that benefit.

Decide which accounts to withdraw from first

When it comes to deciding which accounts to withdraw from first during retirement, there are a few standard guidelines to consider:

Firstly, it is generally recommended to start with your cash or cash equivalents. This ensures that your fast-growing, riskier investments have more time to grow. Withdrawing from cash accounts also helps keep your taxes low during the early years of retirement.

Next, you can turn to your taxable accounts, including individual, joint, and revocable trust accounts. Withdrawals from these accounts are typically taxed at more favourable long-term capital gains rates if held for over a year. As these accounts are not tax-deferred, they will grow more slowly than retirement accounts.

After depleting your taxable accounts, you can consider tapping into your pre-tax retirement accounts, such as traditional IRAs, 401(k)s, 403(b)s, and SEP IRAs. Withdrawals from these accounts are taxed as income, so it is often beneficial to delay withdrawals for as long as possible. However, it's important to note that required minimum distributions (RMDs) may apply at a certain age, as outlined by the IRS.

Lastly, Roth accounts, including Roth IRAs and Roth 401(k)s, offer tax-efficient benefits with tax-free growth and withdrawals. Under the SECURE Act, these accounts have become attractive legacy transfer tools, allowing disbursements to beneficiaries to be tax-free and withdrawals to be potentially deferred for a decade after the account owner's death.

It's important to remember that this is a general framework, and there may be exceptions depending on your specific circumstances and financial goals. Consulting with a financial advisor can help you optimize your withdrawal strategy and ensure that it aligns with your retirement needs.

Consider annuities for income protection

Annuities are a great way to protect your income post-retirement. They are a type of contract that guarantees regular payments for a fixed period or for life. Annuities can be purchased individually or with an employer's help. They are a safe investment vehicle that can provide a steady income stream, protect your principal investment, and offer tax benefits.

There are several common types of annuities:

• Fixed period annuities: These pay a predetermined amount at regular intervals for a specific length of time.
• Variable annuities: These make payments that vary in amount for a set period or for life, depending on factors like profits earned or cost-of-living indexes.
• Single life annuities: This type pays a fixed amount at regular intervals during the annuitant's life and ends upon their death.
• Joint and survivor annuities: This option provides a fixed amount to the first annuitant and, after their death, to a second annuitant for their lifetime.
• Qualified employee annuities: These are retirement annuities bought by an employer for an employee, adhering to specific Internal Revenue Code requirements.
• Tax-sheltered annuities: Special annuities purchased for employees of tax-exempt organisations or public schools.

Annuities offer several benefits, including:

• Guaranteed income for life: Annuities provide a steady income stream, ensuring financial stability and peace of mind.
• Principal protection: Fixed and fixed-indexed annuities safeguard your initial investment, especially in volatile market conditions.
• Tax deferral: Deferred annuities allow tax-free earnings growth until withdrawals are made, enhancing overall investment growth.
• Death benefit: Annuities often include a death benefit, ensuring your beneficiaries receive a payout, avoiding probate.
• Inflation protection: Some annuities have cost-of-living adjustments, helping your income keep pace with inflation and maintaining purchasing power.
• Market downside protection: Indexed annuities offer growth potential and protection against market losses by linking returns to a market index.
• Long-term care riders: Certain annuities allow access to funds for long-term care without penalties, providing financial support for healthcare expenses.
• Creditor protection: In many states, annuities are protected from creditors, safeguarding assets from lawsuits and bankruptcy.
• Diversification: Annuities add a different asset class to your portfolio, reducing overall investment risk and improving income stability.
• Structured payouts: Annuities offer flexible payout options, including lump-sum payments, period-certain annuities, and lifetime income, catering to diverse financial needs and goals.

Annuities are a reliable option to consider when planning for retirement, offering income protection and financial security.

Determine your risk tolerance

When it comes to investing, determining your risk tolerance is crucial for building a portfolio that aligns with your financial goals and comfort level. Here are some factors to consider when assessing your risk tolerance, particularly after retirement:

Time Horizon and Age

While age is often used as a benchmark for risk tolerance, with younger investors typically having a longer time horizon and thus a higher risk tolerance, it's important to remember that this is not a hard-and-fast rule. People are living longer, and even retirees can remain aggressive investors. Consider your expected lifespan and the number of years you have ahead of you to invest. A longer time horizon may allow for more aggressive investing, while a shorter time horizon may call for a more conservative approach.

Financial Goals and Priorities

What are your investment goals, and what are you saving and investing for? If you're investing for retirement, your risk tolerance may be different from someone who is investing for shorter-term goals like buying a home or starting a business. If you're investing for retirement, consider how reliant you will be on those funds and whether you have other sources of income, such as a pension or Social Security.

Net Worth and Risk Capital

Your net worth and available risk capital play a significant role in determining your risk tolerance. Those with a higher net worth and more liquid capital can generally afford to take on more risk. Conversely, if you have limited financial resources, you may need to be more cautious in your investment approach.

Investment Experience

Your level of experience in investing and trading is another factor to consider. If you're new to investing or branching into a new area, it's generally wise to start with caution. Gain some experience and build your knowledge before committing a significant portion of your capital.

Personality and Comfort Level

Risk tolerance is also influenced by your personality and how you handle uncertainty. Some investors are comfortable with taking on more risk and volatility, while others prefer a smoother ride with less volatility. Ask yourself how you feel about market fluctuations and whether you're comfortable with the possibility of significant losses.

Market Volatility and Risk Assessment

Market volatility is an inherent part of investing, and it's important to understand how different factors, such as economic strength, global events, industry disruptions, and earnings reports, can impact your investments. Assess your comfort level with the ups and downs of the market and the potential for gains and losses.

Professional Guidance

Consider seeking advice from a financial advisor or planner, especially if you're retired or approaching retirement. They can help you assess your risk tolerance, provide guidance on asset allocation, and ensure your investment strategy aligns with your goals and risk appetite.

Remember, risk tolerance is unique to each individual, and it's essential to tailor your investment approach accordingly. By carefully considering these factors, you can make more informed decisions about your investments and build a portfolio that suits your needs during retirement.

Frequently asked questions