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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. For those who want hands-on help from an expert, consider enlisting the help of a financial advisor.

How to Invest in Retirement

The biggest thing to keep in mind when investing during retirement is that you don’t quite have the safety net 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.

Potential Investment Strategies in Retirement

How to Invest in Retirement

The Bucket Approach

When planning your retirement investments, 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. This lets you change your investment strategy and your withdrawals as you get older and your needs change.

For instance, you might think that in the first decade of retirement, you’ll spend a good deal on travel but, if you are in relatively good health, you won’t need to spend a ton on medical care. After that first ten years, your travel might slow down but you’ll need to put aside a bit more for health care and, perhaps, nursing care.

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 consider being about 30% invested in stocks. This is an easy way to keep track of your risk and decrease that risk as you get older.

The “Cover-the-Basics” Approach

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.

This approach makes sense if you anticipate your retirement income being relatively low. You’ll want to make sure that everything you have to pay for is covered, like health care and housing costs. Any extra money you have can then be put towards the things you don’t have to have but that will make your retirement more fun.

The Interest-Only Approach

An interest-only strategy is what it sounds like — a retirement plan where the only income generated is through interest, with no money earned from investments, annuities or any other financial products. This is a much less risky retirement planning strategy, as you won’t be subject to the whims of the market. It requires a lot of cash up front, though, so you’ll likely need high income while you are working — and you’ll have to be vigilant about putting enough aside to save for retirement.

Other Strategies

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.

Investments for Retirees to Consider

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.

A number of companies you’ve likely heard sell mutual funds, including Fidelity, Vanguard and T. Rowe Price. One more thing to consider is that there are two types of management for mutual funds — active and passive. An active fund is managed by a financial professional who picks investments and tries to beat the market. A passive fund follows a stock index. Actively managed funds have greater potential but are also more likely to lose money.

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. Dividends generate income for you that goes directly into your pocket, unlike investment returns, which only become liquid after you sell the security. 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

  • Adjusting a whole investment portfolio to optimize your assets isn’t easy. That’s one area where the insight and guidance of a financial advisor can be helpful. Finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • 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 IRA.

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