Although the retirement process is the same for most people today as it has always been, several factors have significantly transformed over the years for present day retirees. Today, retirees face several challenges, many of which the previous generations did not have to worry about. Primarily, life expectancy figures have changed. As per the Money Guide, a 65-year-old married woman has a 50% chance of living over the age of 90 years. Previously, a person retiring at the age of 66 years was expected to live till 79. As per the change in life expectancy figures, a retirement period that would previously last 13 years is now extended to almost 25 years, nearly double. This implies that people retiring in the present generation require a significantly larger retirement corpus than the previous retirees.
Another change that potentially affects the soon-to-be retirees is the diminishing U.S. pension schemes coupled with the lower balances of Social Security funds. Currently, the average Social Security cheque was only $1,500 per month. This is insufficient to cover the monthly expenses of an average retiree, especially if the person is highly dependent on a Social Security pay cheque to pay their bills. The current retirement crisis in the U.S. highlights the need for retirees to focus on saving efficiently and making the right investments before and even after retirement.
Therefore, retirement planning is an evolving process, one that does not stop even after you retire. Making appropriate investments is pivotal before and even after you retire. Investing smartly during retirement ensures you have a regular income stream, pay the minimum in retirement taxes, and do not outlive your retirement savings. But investing after retirement is not as simple as it seems. You have to consistently monitor and rebalance your portfolio to ensure it matches your risk appetite, life stage, retirement aspirations, and most of all, create a regular income stream. If you feel that you do not have the requisite time or knowledge to manage your investments and savings, reach out to a financial advisor who can guide you and handle all matters related to your finances. With a financial professional’s help, you can grow and nurture your investments to create wealth for yourself.
Here are six retirement savings tips for investing after retirement:
1. Be watchful of your risk appetite: Conventional financial wisdom suggests that you should tone down your portfolio in terms of risk as you grow older. This means that as you come closer to your retirement age, your investment approach should ideally be conservative than growth-oriented. The focus should be to preserve capital and not maximize profits. The same investing rule applies even after you retire. The objective during retirement is to ensure your retirement corpus lasts your lifetime. Hence, you may consider investing more money in secure options like bonds and less into stocks. Bonds like government bonds, treasury bills, etc., promise a fixed return and lower risk of default. Even though these bonds offer a medium-to-low return, the safety of capital is paramount, unlike stocks where the risk of loss is significantly higher. How conservative you want to get depends on your risk tolerance and retirement savings. Ideally, you could stay diversified in both stocks and bonds, with the latter being the focal security option, once you start nearing your retirement age. A typical conservative portfolio during retirement comprises 70-75% in stocks, 15-25% in bonds, and the remainder in liquid securities, like cash, money-market instruments, etc. It could be difficult to alter your investing approach in retirement and switch from a growth-oriented mindset to a conservative one. However, if you start restructuring your portfolio as you near retirement, you could easily create a conservative and less-risky portfolio during the final years. It is important to change the portfolio risk because you do not have many years to allow stock prices to recover. Hence, in case of a volatile market movement, you might be forced to sell at a loss.
2. Consider how rising inflation affects your retirement savings: It is critical to be wary of your risk tolerance when investing after retirement, but it is also equally important to be watchful of inflation when making those investments. Inflation erodes your retirement savings, and if you do not factor in the impact of inflation, in the long run, there are high chances, your savings would fall short to cover your retirement years. For instance, assume you spent $50,000 annually and have $1 million as retirement savings. If your investments generate a 3% return and the corresponding inflation is 3% annually, then your retirement savings would last for 20 years. This is not feasible because of the increase in life expectancy; the average retirement span is now 25 years. Alternatively, if inflation rises even by a slight margin, $1 million would erode even sooner. Retirees experience the impact of inflation even more because many of their expenses involve healthcare, costs of which are steeply rising in the country. Therefore, protecting the purchasing power of your money is the key to maintaining your standard of living during retirement. Financial advisors suggest creating a diversified portfolio instead of only relying on bonds as secure investments. Bonds offer mediocre returns, which are insufficient to combat inflation in the long run. It is important even for retirees to include stock investments in their portfolios to offset inflation eventually. Ideally, assuming annual inflation of 3% when planning for retirement, the objective is to increase the portfolio value beyond inflation levels. By factoring in inflation in your investment choices, you would be able to afford those expensive but necessary products and services required by seniors/retirees.
3. Invest only per your need in retirement: To balance risk and returns expectations in retirement, you should ideally invest per your need. Making the right investments will mean balancing your investment risk and also accommodating inflation in your portfolio returns. For instance, if you assume a 5% annual return on your portfolio is sufficient to meet your retirement expenses, you should create a portfolio that offers a 5% + 3% annual inflation return annually. This means that your portfolio is aligned with your risk appetite and inflation. The objective is to avoid unnecessary risks to garner a higher rate of return, such as 10% or 15% annually. Retirement is not the right time to invest for a higher return. The appropriate time to aim for a higher annual return is during the younger years when your risk appetite is significantly higher than now. However, if you are considering passing on a part of your assets or investments as a legacy to your children or grandchildren, you should include that aspect too. Keep the assets you wish to pass as legacy separate from those that will support your retirement lifestyle. Additionally, focus on building a portfolio with more tax-free investments after retirement.
4. Split your assets and invest accordingly: In retirement, you shift from saving to spending mode. Earlier, your portfolio was centered around maximizing profits. However, the strategy needs to change in retirement. The ideal investment advice after retirement is splitting your assets into different segments and investing accordingly. You could divide your assets into short, mid, and long-term segments. The short-term assets could include investments in cash and cash equivalents, such as short-term bonds, money market instruments, etc. The purpose of these investments is to provide a sufficient influx of money for two years or less. These short-term investments can fulfill general expenses or act as an emergency fund. Alternatively, mid-term investments can comprise semi-liquid investments, which could be a balance of equity and bonds. The goal of mid-term investments is to support at least 3-6 years of retirement expenses, like building a home, traveling, establishing a part-time business, etc. The last investment segment – the long-term assets can consist of investments with a long-term maturity. You could consider investing in stocks that offer high rewards at considerable risk in the long term. The idea of long-duration investments is to pay for major retirement expenses like healthcare costs, unexpected emergencies, etc. It is advisable to include long-term and riskier investments in the last segment because they will have the time to recover from short-term volatility or bear markets.
5. Create an efficient withdrawal strategy: Your retirement savings comprise investments in your employer-sponsored program like a 401(k), Individual Retirement Accounts (IRAs), etc. While it is essential to focus on investing wisely in these accounts, equal weightage should also be given to withdrawals from these retirement accounts. Apart from retirement accounts, you also get Social Security benefits during retirement. Overall, it is wiser to create a strategic withdrawal plan to utilize the retirement corpus smartly, ensuring you do not outlive the balance. Each retirement savings plan, like an IRA or a 401(k), has withdrawal terms and restrictions. You can make money from your 401(k) or an IRA as soon as you turn 59.5, irrespective of whether you are retired or not. In most cases, withdrawals before this age attract a 10% penalty. But it is vital for you to assess whether you should withdraw your 401(k) balance at this age or not. Allowing your funds to stay invested for a longer duration will help you grow your retirement nest egg. However, you cannot leave your funds in these accounts indefinitely. The IRS (Internal Revenue Service) mandates you to take RMDs (Required Minimum Distributions) from your 401(k) and IRA by April 1 of the year you turn 72 years. If you fail to take the RMD, you could be liable to a penalty of up to 50% of the sum not withdrawn. That said, you can take more funds than your RMD without penalty. Apart from these withdrawals, it is also vital to focus on Social Security benefits during retirement. Ideally, you can withdraw your Social Security benefits from the age of 62. But delaying Social Security withdrawals could help you increase your paycheque. As per studies, an average retiree can amplify their Social Security balance by 50% if they do not withdraw any Social Security benefits until 70. Delaying Social Security withdrawals till you turn 68 years (one year post the official retirement age) can boost the Social Security benefits equivalent to 108% of the monthly benefit. Therefore, during retirement, a pivotal task is to create a drawdown strategy that fulfills your retirement needs but also maximizes your income without any penalties or tax duties.
6. Develop an estate plan: An important aspect of investing after you retire is to make investments that align with your estate plan. If you want to pass on any assets to your heirs, it is wise to create an estate plan as early in retirement as possible. Estates attract hefty taxes. Currently, estates worth up to $11.7 million are exempt from federal taxes. However, some states still levy taxes on lower estate values than the federal limit. In addition, inheritance taxes are also charged for beneficiaries when they inherit the estate. To pass on the legacy to your family or legal heirs in the most tax-efficient manner, you should focus on intricate planning. To lower estate taxes, you could use strategies such as creating an A-B trust, a joint trust for married couples to reduce estate taxes. Alternatively, you can consider creating a living trust, where you place all your assets when alive and pre-decide the passing of ownership and distribution of assets in your absence. Comprehensive estate planning can also help you minimize your retirement taxes. Estate strategies like giving donations to charitable organizations help reduce your tax liability. By sponsoring the education of your children or grandchildren, you could help your family and lower your estate tax burden. Giving lifetime gifts to spouses and children, making transfers to custodians of your minor or disabled children, etc., can also ensure you pay the minimum in taxes during retirement while creating a tax-friendly estate for your beneficiaries. Apart from creating an estate plan for assets, factor in other estate plan aspects like drafting a will, establishing a power of attorney for taking decisions in case of physical or mental incapacitation, listing health directives, etc.