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How to Invest Money After Retirement


Investing during retirement can be something of a catch-22. On the one hand, you want to keep your money growing. You don’t want to let it languish in a no-interest checking account, though doing that may cause you to lose value relative to inflation. On the other hand, you want to keep your money safe. You’re done working which means there’s likely to be no more reliable income with which you can replace portfolio losses. Investing in retirement, then, is about balancing these two needs. Here are key issues to consider before picking specific securities or an asset allocation. You can also work with a financial advisor who can advise you on the best investment choices for your unique situation.

Rate of Withdrawal vs. Approach to Risk

Your rate of withdrawal, meaning how much you need to take from this account each month, can help inform your approach to risk. If you have invested in traditional assets like stocks and bonds, over time most portfolios can recover from short-term losses. During 2022, for example, the value of most stock portfolios has dipped considerably. Over the next several years, those investors can likely expect to recover their losses as the market resumes its growth.

What’s different for a retiree is that you don’t always have the time to let those assets sit still. You need to periodically sell assets and make withdrawals because this is the money you will live on.

So for a retiree investor, the rate of withdrawal is an essential issue when it comes to risk management. The more money you need to withdraw each month, the less flexibility you’ll have to leave assets alone and recover from losses. By contrast, the less money you need each month as a proportion of your overall portfolio, the more flexibility you’ll have to leave your portfolio alone after a downturn. Or if you have alternative assets that you can rely on in case of losses, the same rules apply.

The more you can leave assets in place during a down market, the more aggressive you can get with your investments during retirement. Knowing your rate of withdrawal will help define that flexibility.

Capital Appreciation vs. Income Investment

Broadly speaking, there are two general approaches to investing as a means of income. The first is capital appreciation investment. In this case, you invest in assets that you intend to sell. When assets appreciate in value, for example as a stock goes up, you sell the investment and use the capital gains as a source of personal income. Most investors keep the profits from the sale and put the original capital back into new investments.

The second approach is income investment. In this case, you invest for assets that you intend to hold. Those assets then generate payments over time, such as the interest from a bond or the dividend payments from a stock. That yield becomes the source of your personal income and you make active trades to maximize your portfolio’s payments over time.

Capital appreciation investment tends to be a higher risk/higher reward approach compared with income investing. You can make more money, but you face a greater chance of loss. On the other hand, while income investing is far more reliable than capital appreciation, you generally need more money invested to generate meaningful gains.

For a retiree, income investing is often a strong option if you can afford it. This strategy provides the kind of structure that retirees generally prefer. But many investors may find that they don’t have enough upfront capital to make this. Annuities are another form of fixed-income asset that can be a strong asset to the right portfolio, but they may require earlier investment to generate meaningful returns.

Consider the Economic Environment

how to invest after retirement

Within the overall marketplace, consider the risks of both investment and noninvestment. Noninvestment can leave you vulnerable to inflation. For example, leaving your money in something like a savings account can actually generate significant losses. If you’re making 1% interest during 7% inflation, then you have effectively lost six points of value over the year. That may suggest choosing a more aggressive investment option to compensate for those soft losses.

By contrast, investing in a down market is often a good move but be sure to consider your personal needs. As noted above, retirees have a much shorter window when it comes to investing because they need to make active withdrawals from their portfolios. So a bear market that might create opportunities for someone who can leave their portfolio alone might not work for someone who needs to sell those assets in 18 months.

Finally, consider your own finances and costs of living. Where you live and what you need will go a long way toward determining what your portfolio needs to achieve. Someone who lives in Michigan’s Upper Peninsula will need far less money each month than a retiree who lives in Boston or San Francisco. Plan your portfolio and its investments according to your needs and potentially plan your needs around what your portfolio can achieve.

Other Considerations for Retirement Investing

There are other considerations that you need to pay attention to when you’re investing after retirement that might be unique to you or the types of investments you choose. It’s important that you find a way to make sure these extra considerations aren’t hurting you based on what your investment choices are.

Tax Liability

Many investors fail to understand that their retirement assets are often taxable. While your withdrawals from a Roth IRA aren’t taxed, just about any other retirement asset is subject to income and maybe also capital gains taxes. That includes 401(k) accounts, IRAs and even Social Security. When you invest for capital appreciation, you will pay capital gains taxes on your withdrawals. If you invest for income, such as dividends and interest payments, you might pay income taxes.

Among other concerns, make sure you account for taxes as you plan your overall savings. Your portfolio will need to generate enough money for you to live comfortably and pay taxes on those withdrawals, so when you calculate how much money you’ll need don’t forget to add the extra 15% to 20% for taxes.

Capital Assets

In addition to your financial portfolio, consider your other capital assets. In particular, many retirees own their own homes. Capital assets can be an additional source of funds at need. How you integrate this into your plan will depend on their nature. Assets that you’re comfortable selling can be a good source of liquidity and can give you a pool of money with which to make higher-risk investments. Assets that you don’t want to sell, like your home, can still act as an emergency fund.

Dependents and Heirs

If you have family members and other dependents, you will want to plan their needs into your monthly drawdown. Anticipate those expenses in your income. Importantly, if you have dependents you may need to take a more conservative approach to your investments. It’s easier to make cuts to your own lifestyle in case of losses than to cut the money someone else depends on.

Beyond that, start deciding if you will want to leave money behind. Do you have children, for example? Or are there organizations that you would like to support? All of this will help determine how you want to manage your investments and drawdowns. The more money that you need for active dependents, the more money you will need each month. The more money that you want to leave behind, the more wealth you’ll need to accrue and maintain.

The Bottom Line

how to invest after retirement

Investment shouldn’t stop just because you entered retirement but your strategy should probably change. Once you’ve stopped working it’s time to start building plans around how much financial flexibility you have, what your goals are and what kind of risk you can accept now that there’s no new money coming in the door. Make sure you choose investments that are going to help your overall financial goals.

Tips for Investing

  • It’s really important to consider the fact that you don’t have to do anything on your own. You can work with a financial advisor who can help manage your portfolio and give you the pros and cons of retirement investment choices. If you don’t have a financial advisor, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Many advisors suggest that retirees should focus entirely on safe assets like bonds and banking products. That’s not a bad approach for the money that you need, but you don’t have to eliminate risk entirely. Just make sure you keep your actual income safe while investing during retirement.

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