‘The game of retirement has changed.’
Since many retirees are living longer, their money is going to have to work harder for them. But traditional retirement investments won’t cut it. Safe fixed-income products like U.S. Treasury notes earn less than 3 percent and inflation is at 2 percent, so retirees will have to consider investment alternatives to avoid outlasting their money. “There’s no doubt the game of retirement has changed,” says Beau Henderson, Atlanta-based author of several books including The RichLife: Ten Investments for True Wealth. “Pensions are down. The individual is responsible more and more for their own retirement.” That means investing in retirement. But it’s a little different than investing when you were working.
Don’t abandon stocks.
Since retirement could last decades, you’re going to need some growth, says Judith Ward, senior financial planner at T. Rowe Price in Baltimore. “Over the long term, stocks still have the greatest growth potential,” Ward says. But retirees don’t need to be as aggressive in stocks as someone still working. Ward advocates between 40 to 60 percent of your portfolio should still be in stocks, with more conservative investors having the smaller allocation. Over the last 20 years, the average investor could still get 80 percent of the return of an all-stock portfolio and just 60 percent of the volatility with a 60/40 stock/bond mix.
Stay diversified.
Within that 60/40 stock-bond mix, be sure to have a diversified portfolio. That includes a mix of growth stocks and some high-quality stocks like dividend payers. And don’t just stay in domestic arenas, look globally. That’s a key to diversification, Ward says. “When you have a diversified portfolio, you are going to have areas that are going to lag and areas that are going to lead,” she says. “That’s the nature of diversification.” Investors need to be prepared when certain portfolio allocations lead and lag, she says, and a financial advisor will take that into consideration of how this will fit you and your time horizon.
Have a cash cushion.
During a bear market, making withdrawals from portfolios locks in losses. Aside from your required minimum distribution from qualified accounts, investment advisors advocate limiting withdrawals when stocks are lower. To ride out bear markets, increase your cash cushion, Ward says. A bigger cash cushion also helps conservative retirees feel more confident in their financial situation. Depending on your risk tolerance, Ward says consider putting between one to three years of your spending needs in cash. “It’s like a reserve, so that if everything is down at the same time they have that cash reserve they can draw from,” she says.
Convert some assets to Roth IRAs.
Taxes can take bite out your income, so to minimize taxes, consider converting some of your traditional individual retirement account assets to Roth IRAs, says James Hickey, chief investment strategist at HDVest in Irving, Texas. You will need to pay taxes on the money converted, but once those funds are in the Roth, the earnings can grow tax-free. It’s best to do these conversions early in retirement to get the most out of the tax-free growth. Work with an accountant when making the conversions to avoid accidentally getting tipped into a higher tax bracket. “Stagger it over a couple of years,” he says.
Prepare for big expenses.
Retirees can face big expenses such as critical illness or fixing a roof. Routine expenses like buying new cars and general home maintenance can be costly, Henderson says. Just the impact of inflation can eat into earning power. In addition to the cash cushion, consider earmarking some of your growth stocks for a long-term contingency fund, since you can’t budget for unknown big expenses, Henderson says. “Think about putting an extra month [expenses] earmarked to be tapped at a later date,” he says. “If something comes up down the road you can tap those funds and not take on debt.” The growth part of your portfolio should be considered money you’ll need down the road, not money to live off today, he says.
Think total return.
In their zeal to get as much steady income as possible, many times retirees gravitate to high dividend-paying stocks and only focus on the dividend yield and not the stock’s price, says Mike Piershale, president of Piershale Financial Group in Crystal Lake, Illinois. Narrowly focusing on stock dividends misses the big picture. “Sometimes you’ll see an investment that has a high dividend, but if you look at the total return in the last 12 months it’s underwater,” Piershale says. That ultimately hurts retirees.
Plan your income choices.
Look at your predictable income sources — Social Security, maybe a pension or other type of income such as from a hobby or rental property. Compare those to spending expectations in retirement. That will give you an idea of how much income you’ll need from your investment accounts and how to allocate the stock side of your portfolio. “It’s really important [to] understand what are all of your sources of income in retirement and then how much are you going to have to withdraw from your portfolio,” Ward says.
Explore all fixed income options.
With the 10-year U.S. Treasury note yielding just under 3 percent, seniors will need to have higher-yielding income options to stay ahead of inflation, Hickey says. “It’s not ‘turn your back on fixed income,’ but I think you cannot invest in things where the yields are too low, you’re wasting valuable resources,” he says. Alternatives to low-yielding Treasuries include master limited partnerships, real estate and even preferred equities which have a much higher yield than Treasuries. There are a lot of niches to explore with a financial advisor, he says, and there are investments that are uncorrelated with the stock market.
More from U.S. News
9 Ways to Invest in Business Development Companies
7 Food ETFs to Buy for Your Shopping List
9 Things to Know About Tax Lien Investing
8 Simple Rules for Investing in Retirement originally appeared on usnews.com
