Each day in the U.S., 10,000 individuals turn 65, and the number who cross that threshold will exceed 88 million, or about 20% of the U.S. population, by 2050, AARP International predicts based on data from the UN Population Division.
Age 65 is an important milestone for many American workers because it’s when many file for Medicare coverage (at least Part A) and contemplate retirement. Health care coverage is just one among several key topics to tackle when it comes to retirement. For many, other topics are top of mind, such as where to live, how to manage cash flow, how to manage sticky inflation and how to manage investments during retirement.
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In fact, according to BlackRock’s 2022 “Read on Retirement” survey, 64% of workplace savers are concerned about having enough funds to last throughout their retirement, and 80% want help from their plans to get through their retirement years, not just reach retirement.
If you are thinking about your plans for investing in retirement and beyond, here are 10 strategies to consider:
— Take inventory of your spending needs.
— Avoid fear-driven or emotional decisions about investments.
— Make sure your portfolio is sufficiently diversified.
— Aim for tax efficiency in your portfolio.
— Consider annuities for income protection.
— Mitigate sequence-of-return risk.
— Hold cash reserves for emergencies and short-term goals.
— Consider hiring a financial planner.
— Hold enough equities in your portfolio.
— Manage your estate.
Take Inventory of Your Spending Needs
Fidelity suggests savers may need to budget for 55% to 80% of their pre-retirement work pay to cover a variety of expenses throughout their retirement, depending on things like income, lifestyle preferences and health care costs. For many, Fidelity estimates that about 15% of their retirement expenses will be related to health care costs of some kind. Below are some income-replacement parameters from Fidelity:
| Annual income range at retirement | Estimated retirement-income replacement |
| Less than $50,000 | 80% |
| $50,000 to $80,000 | 75% |
| $80,000 to $120,000 | 70% |
| More than $120,000 | 55% to 65% |
Avoid Fear-Driven or Emotional Decisions About Investments
The urge to switch course on investment allocations can be strong at times. Take, for example, when the benchmark mix of 60% equities and 40% bonds plunged by 17% in 2022, according to data from Bloomberg. A balanced allocation of this nature is common among retirees.
Market volatility is common, and is often temporary, too. Based on rolling returns of stocks between 1928 and 2022, investors saw positive returns 88.2% of the time during five-year periods and 94.9% of the time during 10-year periods, BlackRock reports. So, the longer you stay invested, the greater the likelihood of gains.
“Staying invested and riding out the market declines result(s) in a better outcome than selling at the market low.” – Brian Severin, senior executive vice president, Mutual of America Financial Group
Some investors miss out on long-term, positive returns because they abandon their investment strategies in times of turmoil. But J.P. Morgan estimates that if an individual maintained her investment of $10,000 in the S&P 500 from Jan. 1, 2003, through Dec. 31, 2022, her balance would be $64,844. But what if she missed out on just 10 of the best days in the market? Her ending balance would be diminished to $29,708, a loss of more than $35,000 in earnings.
“Panic-driven decisions, like selling investments based on short-term market volatility, are not a good solution. For example, in 2022, inflation was raging, and the S&P 500 declined about 20%, but since last October, the index has been up more than 20%. So, staying invested and riding out the market declines resulted in a better outcome than selling at the market low,” says Brian Severin, senior executive vice president and chief marketing officer for Mutual of America Financial Group.
Make Sure Your Portfolio Is Sufficiently Diversified
About 25% of Americans say they do not have an opinion on whether their investments are diversified, according to a 2019 CNBC-Morning Consult survey of 2,200 adults throughout the U.S. The same survey also revealed that more than four in 10 Americans do not actively monitor their portfolios to make sure their investments are diversified, while only about 34% say they do review their investments for diversification.
The modern concept of diversification is often ascribed to the work of U.S. economist Harry Markowitz. In 1952, he penned an article for the Journal of Finance entitled “Portfolio Selection,” in which he argued that investment risks and rewards are equally important for portfolio design. Markowitz was later awarded the Nobel Prize for his development of the Modern Portfolio Theory.
Common asset classes — like cash deposits, bonds and equities — inherently possess potential risks and rewards for investors. Portfolio diversification often includes more than just one type of investment to help investors buffer downside risks and potentially reap the rewards from multiple investment sources as they manifest over time.
“Diversification is beneficial provided that returns aren’t perfectly correlated,” says Michelle Cluver, chartered financial analyst and portfolio strategist at Global X ETFs. “The optimal situation is to combine market areas that respond differently. For example, equities and fixed income traditionally have a low correlation, as fixed income can provide a cushion during periods of economic stress where equities are likely to face headwinds.”
She adds that after diversifying across asset classes, it’s important to diversify within each asset class. Diversify geographic, sector and industry exposures within equities, and vary the duration, segment and credit positioning within fixed income.
[READ: 7 of the Best Tax-Free Municipal Bond Funds]
Aim for Tax Efficiency in Your Portfolio
Beyond portfolio diversification, the way you allocate investments across different types of investment accounts can also improve your outcomes over time. This approach is often referred to as a tax-smart strategy and allocates investments such as municipal bonds and exchange-traded funds, or ETFs, to taxable accounts and more active investment strategies, such as multi-asset income funds, to tax-deferred accounts (e.g., an IRA).
Consider Annuities for Income Protection
Research from the Life Insurance Marketing and Research Association revealed that 70% of workers believe an in-plan guarantee (or an income annuity of some kind) should be an option in their workplace retirement plans, like 401(k) and 403(b) retirement plans.
Longevity is a key planning priority. In fact, the Social Security Administration estimates that men and women will live another nearly 17 and 20 years, respectively, after they reach age 65. Low-cost annuities (yes, they do exist) can be an effective strategy to mitigate longevity risk for some retirement investors.
Mitigate Sequence-of-Return Risk
“It’s important to manage risks from both long- and short-term perspectives. In the early years, participants are exposed to market and event risk, and a high allocation to diversified risk assets allows for both higher growth potential and the ability to dampen volatility in shorter time periods. As people come closer to retirement, interest rate risk, longevity risk, and market and event risk become more prevalent as cash flow volatility increases,” says Dan Oldroyd, managing director and the head of target-date strategies for Multi-Asset Solutions at J.P. Morgan.
If the equities market takes a double-digit dip shortly after an investor retires, it can complicate their withdrawal strategy. This quagmire, the prospect of having to sell more shares of a stock or equities fund to generate the level of income needed, is often characterized as the sequence-of-return risk. Investors can buffer this risk with a targeted allocation to less volatile investments, like cash equivalents and short-term bonds, to cover one to two years’ worth of cash-flow needs.
[READ 5 of the Best Stocks to Buy Now]
Hold Cash Reserves for Emergencies and Short-Term Goals
Less than half of Americans have enough emergency savings on hand to cover three months’ worth of nondiscretionary expenses, according to data from a 2023 Bankrate emergency savings report. Some good rules of thumb are for dual earners to maintain enough savings in bank deposits or liquid money-market funds to cover three months’ worth of fixed expenses; the metric is six months’ worth of expenditures for single earners.
What about short-term goals, like a down payment for a new home? Generally, a short-term goal includes an expense that could occur within the next 60 months. So, it’s a good practice to keep designated savings for short-term goals in liquid, stable deposits as well.
Consider Hiring a Financial Planner
Are you comfortable with your current strategies for retirement? How do you monitor whether you are on track with your financial goals? If you are open to a collaborative approach for these types of questions, consider engaging an objective financial planner, such as a certified financial planner, or CFP, practitioner.
A 2021 Fidelity Investor Insights Study cites data that show investors’ annual outcomes have been enhanced by approximately 1.5% to 4% over time by working closely with a financial advisor. These positive outcomes were generated by intentional strategies, like a personalized investment plan, tax-smart withdrawals, Roth IRA conversions and estate planning.
Hold Enough Equities in Your Portfolio
To help keep up with inflation and stay on track with the growth potential you may need through retirement, lean into the “Popeyes” within your portfolio. Much like the spinach consumed by the hardy cartoon character, innovation in equities combats inflation and delivers the needed returns over time. According to research from Hartford Funds, from March 1973 to December 2020, U.S equities exceeded the rates of inflation 76% of the time when inflation was above 3% and on a downward trend.
“Equity level is an important decision when planning for retirement,” says Oldroyd. “We focus on replacing income, leveraging Chase data representing half of America’s households to understand the needs of retirees. This motivates our 40% equity allocation at retirement, to ensure we can support retiree spending for their entire retirement journey.”
Manage Your Estate
Income in respect of a decedent, or IRD, includes any income someone would have received if death had not occurred, and was not included in their final tax return. Some common examples of IRD are uncollected wages, distributions from a deferred compensation plan, bank-deposit interest, accounts receivable paid to a decedent’s small business (cash basis only), exercised stock options and taxable distributions from a retirement account.
If the IRD and other assets owned by a decedent are not adequately accounted for in an estate plan, things can get complicated, or even burdensome, for surviving loved ones. As a preventative measure, check on the beneficiary designations for your retirement accounts, and review the “big three” documents: will, durable power of attorney and advance medical directive. A qualified estate attorney can make sure these documents reflect your intentions and are up-to-date with prevailing state laws.
Takeaway
These 10 strategies are not exhaustive, but they are intended to establish a framework for a deeper level of customization and confidence in a retirement plan. They also reinforce the many aspects of retirement planning that are within your control as an active participant in a workplace retirement plan as well as any outside investments. It’s important to diversify, manage sequence-of-return risk and keep enough equities in your portfolio to battle inflation and support your individual retirement needs.
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10 Strategies for Investing After Retirement originally appeared on usnews.com
Update 07/05/23: This story was previously published at an earlier date and has been updated with new information.
