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How to Invest in Retirement

A big part of your financial health relies on saving enough for retirement, from maximizing your 401(k) contributions to growing your other investment portfolios. But what happens to your investments once you reach retirement? Of course, finally reaching your golden years doesn’t mean you have to close all your investment accounts. Instead, you’ll need to make some changes to your portfolio to reflect the life change.

How to Invest in Retirement

The biggest thing to keep in mind when investing during retirement is that you don’t quite have the privilege of a steady salary. While you’re working, you can afford to take on risk in your portfolio and invest competitively. If the market takes a dip, your salary provides a safety net so you don’t have to rely so heavily on your portfolio performance. Once in retirement, however, your limited income eliminates that kind of flexibility.

As you head into retirement, review your investments for the risk they pose. Are you mostly invested in volatile equities? Switch to reliable investments that offer more predictable growth. That way, your money won’t be tied up in insecure stocks without a strong way to recover. If you do have a substantial income in retirement, you can take on a bit more risk if you chose to do so. This could be the case if you chose to wait for your full retirement age to receive Social Security payouts. Placing your money in riskier investments could result in bigger payouts which could come in handy if you expect a decades-long retirement.

Regardless of the risk you’re safely able to take on in retirement, you still want to make sure your refreshed portfolio will continue to produce results. Check each new investment’s reliability so you can rely on a comfortable rate of growth and income throughout retirement.

Best Investment Practices in Retirement

How to Invest in Retirement

When planning your investments in retirement, you have a couple of options on how to approach it. A “bucket” approach involves splitting your retirement savings into sections, beginning, middle and end, and reducing risk as you go. To the opposite, the “cover-the-basics” strategy splits up your reliable income (Social Security, pensions, etc) among your necessities. Your extra expenses like entertainment and travel can then be covered by your extra investments.

As a guide, it may help to follow an old rule that states your stock weighting should equal the difference between 100 and your age. So for example, at age 70, you should be investing 30% in stocks. This is an easy way to keep track of your risk and decrease that risk as you get older.

There are other tactics to employ to ensure a financially healthy retirement. For starters, you might want to consider delaying receiving your Social Security benefits. Receiving these benefits before you reach full retirement age already reduces the maximum benefit. To the opposite, if you delay claiming those benefits all the way up to age 70, you can benefit from 8% raises in payouts each month.

Even though you may set up the least risky portfolio in retirement, there are still opportunities for investment losses. To ensure a wider safety net, you could set aside at least five years’ worth of uncovered expenses in cash. Uncovered expenses include those not covered by your monthly Social Security or pension payments. So if you’re spending about $5,000 a month and receiving about $4,000 in income, you’ll want to set aside $1,000 each month. This adds up to $12,000 a year and $60,000 as five years’ worth.

Best Investments for Retirees

So now you know you can continue investing in retirement as long as you adjust your risk levels, it’s time to do the adjusting. Your instincts might be to steer clear of stocks entirely, but that’s not entirely true. Luckily, if you use either the “bucket” or “cover-the-basics” approaches, they should both hold fast in the event of a stock market downturn. Still, you can invest half of your assets in stocks and the rest in shorter-term bonds and cash if you’re not comfortable going all in on stocks. Bonds are good for ensuring steady interest income. You can also split your stocks among domestic and foreign stocks for more variety.

An easy way to invest with this strategy is to open mutual funds. One type of mutual fund is a retirement income fund that allows you to invest your money in a diversified portfolio of stocks and bonds in one go. If you’re more into real estate, you can use real estate investment trusts (REITs) to invest in a collective of apartment buildings, commercial structures, vacation properties and more. Although you benefit from the profits, you don’t have to manage these properties yourself, as a professional can do that for you for an extra fee.

If you do decide to stick more with stocks, consider dividend income funds. These are a collection of stocks that a fund manager oversees. The underlying stocks in the fund will pay out dividends for you to collect and use in retirement. Again, just be careful of the risks associated with stocks, like the promise of “high-yield” dividends.

Bottom Line

How to Invest in Retirement

Your main focus of investing in retirement should be to reduce your portfolio’s total risk and ensure steady, usable growth. You can follow these suggestions as you revamp your portfolio, or simply enlist the help of a financial advisor. This professional can help construct the most ideal portfolio for you and your retirement goals. Whether you take a DIY approach or not, always remember that your portfolio is yours to personalize according to your financial situation. Keep it relatively safe and simple to ensure a comfortable retirement.

Tips on Saving for Retirement

  • Investing in retirement can be a smart tactic when executed properly. However, it’s important to start saving for retirement as soon as you can, whether in a 401(k) plan or IRAs.
  • Adjusting a whole investment portfolio to optimize your assets isn’t easy. Luckily, finding a financial advisor is as simple as taking SmartAsset’s short quiz. We’ll connect you with advisors in your area with this advisor matching tool to help you get started. A financial advisor can really come in handy as you prepare your portfolio for retirement.

Photo credit: ©iStock.com/shapecharge, ©iStock.com/shapecharge, ©iStock.com/Alex Potemkin

Lauren Perez, CEPF® Lauren Perez writes on a variety of personal finance topics for SmartAsset, with a special expertise in savings, banking and credit cards. She is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. Lauren has a degree in English from the University of Rochester where she focused on Language, Media and Communications. She is originally from Los Angeles. While prone to the occasional shopping spree, Lauren has been aware of the importance of money management and savings since she was young. Lauren loves being able to make credit card and retirement account recommendations to friends and family based on the hours of research she completes at SmartAsset.
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