Retirement is an exciting time—a time to explore new hobbies, travel, spend more time with loved ones and relax. Although many investors have some type of retirement savings—such as an employer-sponsored plans, individual retirement accounts or pension plans—and may expect Social Security income, few think about investing during retirement and creating an ongoing retirement plan.
Investing during retirement is an important part of meeting your longer-term financial goals. In the years leading up to retirement, you may have invested in stocks, bonds, mutual funds, exchange-traded funds or other securities. But retirement isn’t a stopping point. Once you retire, you may need to continue investing for decades to make sure you are able to live comfortably and meet your long-term goals.
Investors who have entered retirement often assume they can relax—and they should! But depending on their individual circumstances, their nest eggs may need to get to work. For many investors, managing their investments during retirement is critical to their ability to reach their long-term goals.
Running out of money in retirement is a common retiree fear. Here are some important considerations to help you avoid this worst-case scenario when investing during retirement:
Investment time horizon: Americans are living longer. As medical science and overall living standards have made great leaps, life expectancy has increased. More people are living to an advanced age—and that means a potentially longer retirement than you expect.
Unfortunately, many investors underestimate how long they will live and run the risk of depleting their retirement funds too early. Your age at retirement is less important than how long you need your money to last. It is more important to determine your investment time horizon. This should include not only your life expectancy, but also the expected life spans of yourself, your spouse and any dependents on your retirement funds.
Life expectancies vary among spouses and families, which is why spouses should plan for their joint life expectancies. You should also factor in goals that go beyond you and your spouse’s lifetime, such as any legacy or donation plans. All these factors have an impact on how much retirement income you need regardless of your age.
Increasing costs: When you plan an investment strategy during retirement, it is likely you could face increasing costs for a variety of living expenses. With your potentially longer life span, you may also be facing these increasing costs over a longer time horizon than expected. Your cost of living in retirement may include expenses in sectors that have recently risen faster than the average inflation rate, such as education or health care.[i] Perhaps you wish to help a child or grandchild with college tuition—an expense that has outpaced average inflation in recent years.
As people age, use of health-care services, medical devices and medications typically rises. This increased consumption is in a category with relatively fast-rising prices. Health-care costs tend to grow as a proportion of income as you age, as does the cost of living, especially if you are in assisted living. This means your retirement income will need to help cover these additional costs.
Inflation: Don’t underestimate inflation’s impact. It decreases purchasing power over time and diminishes real savings and investment returns. Since 1925, inflation has averaged roughly 3% a year.[ii] If that average inflation rate continues, a person who currently requires $50,000 to cover annual living expenses would need an annual income of approximately $90,000 in 20 years and about $120,000 in 30 years—just to maintain the same purchasing power.
You should define your growth objectives and how much money you plan to have in your portfolio at the end of your investment time horizon. For example, if your portfolio grows 5% annually and inflation is 3%, you are only getting a 2% annual return (before taxes). If you require more growth from your investments in retirement, you may need to allocate a larger portion of your portfolio towards assets with relatively-high long-term expected returns, such as equities.
Withdrawal amounts: The rate and amount you withdraw during retirement can impact your overall retirement planning strategy. Some investors have unrealistic expectations of how much they can withdraw each year during retirement. Remember that returns vary year over year, so you may not be able to withdraw the same percentage each year without drawing down your principal.
Your long-term financial goals are of utmost importance to investing during retirement. They are key when implementing an optimal investment strategy and sticking with it, even during times of market volatility. If you are not quite sure what your long-term goal is, here are some questions to consider.
As long as you have identified your goals and instituted an investment strategy to help you achieve them, you should be able to relax and enjoy your retirement. Still, you should check in regularly to make sure changes to your goals or circumstances don’t warrant any portfolio changes.
Investing during retirement can be a daunting and potentially unwanted responsibility, and investment growth doesn’t need to stop at retirement. As an investment adviser, Fisher Investments can help determine your optimal asset allocation, analyze your growth needs and manage your investment portfolio throughout retirement.
[i] Source: FactSet, as of 2/12/2018. US Bureau of Labor Statistics Consumer Price Index categories, 12/31/1990 - 12/31/2017. College tuition, Hospital Services and Medical care have risen 357%, 353% and 182% respectively over that 17-year-span versus the Consumer Price Index’s 85% increase.
[ii] Source: Global Financial Data, Inc., as of 1/9/2018. Average annualized inflation was 2.87% from 12/31/1925 to 12/31/2017, based on the US BLS Consumer Price Index.