Your Investment Mix During Retirement
Financial institutions often help educate workers about how to save for retirement. But they often give little attention to how to invest while you’re spending during retirement. Fortunately some of the same principles apply.
- Diversify with an eye to longevity: A key principle is to diversify your investment mix. Depending on what age you retire, you may still have another 15, 25 or 30 years of living expenses to support with your investments. Over that much time inflation is a real concern, as is outliving your money. To address inflation and longevity, you might consider including riskier assets such as stocks and real estate.
- Generate income: As a retiree, you also need income, so be sure to include a healthy dose of bonds (or other source of income such as dividends, interest, REITs and rental income) in your investment mix. A mix of government and corporate bonds will give you a blend of safety and higher yields. Another way to combat inflation is through the use of Treasury inflation-protected securities (TIPS). These government bonds automatically adjust for increases in inflation. (Because of income tax treatment, it’s usually best to hold TIPS in a tax-sheltered retirement accounts such as an IRA.)
- Consider rental properties: Another potential source of income is rental property. Owning rental property carries its own set of challenges, such as maintenance, bookkeeping, tax reporting and dealing with tenant "issues". If you are comfortable with tasks like these, rental income can be a nice complement to bond income.
- Keep emergency funds in cash: For emergency purposes it’s a good idea to set aside at least one year's worth of living expenses. Keep this money in some form of cash, such as a money market mutual fund or CDs. Aside from an emergency fund, consider keeping cash (ideally 3-5 years of expenses) in your investment mix also may prevent you from having to sell riskier investments in a down market, buying you some time for the investments to recover.
Many of the investment choices listed above are available as mutual funds or exchange-traded funds. These are good options for most retirees since you benefit from a professional money manager, who chooses which individual securities to buy and sell. Rather than concentrating your investments in a just a few securities, these mutual funds often own dozens and even hundreds of securities, giving you more diversification for your retirement savings.