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- When you retire, your investment objective shifts from growth to a combination of income and growth.
- Retirees must manage the dual risks of their portfolio losing value and running out of money in retirement.
- Certificates of deposit, annuities, and dividend-paying stocks are among the lower-risk investment options available.
Retirement is a turning point. While you navigate this new adventure, your investment strategy also needs to adapt to match your current lifestyle. Instead of focusing on accumulating wealth, your investment strategy should transition into risk management and ensuring your savings last, potentially for several decades.
You can use a combination of income and growth investments to help your post-retirement portfolio keep up with inflation and provide a reliable income. Consider consulting retirement experts from one of the best online financial advisors for professional insight and guidance.
Here are the best investment strategies for retirees in 2024.
Introduction to post-retirement investing
Why investing after retirement is important
Investing doesn’t end with retirement. Since retirement can last several decades, many retirees worry they will outlive their savings by spending too quickly or suffering from inflation and rising healthcare costs. One solution to combat these fears is to continue investing during retirement.
“Investing post-retirement should focus on the ability to bear risk,” says Mel J. Casey, CFA and senior portfolio manager at FBB Capital Partners. “It should aim to strike a balance between generating enough growth to get retirees to the finish line while avoiding sharp drawdowns, which could negatively impact their standard of living.”
Emily Harper, CFP, vice president and partner at Monument Wealth Management, talks about the importance of carefully managing post-retirement income to prevent prematurely running out of savings.
“Instead of having a fixed paycheck that covers your needs while you are working,” says Harper, “retirees face the challenge of relying on multiple sources of income — sources that are often variable.”
Key considerations for post-retirement investing
Some of the key considerations that go into developing a post-retirement investing plan include:
- Cash flow: Understand how you will spend your money during retirement and the required cash flow. By understanding your predicted expenses, you can create a foolproof budget that factors in inflation and the rising cost of healthcare. Budgets should be reviewed and adjusted regularly.
- Flexibility: It’s impossible to predict your retirement spending needs with 100% certainty. A post-retirement investing plan needs to account for this variability by allowing you to be flexible in the size and timing of your withdrawals, Harper says. This will also let you maintain some control over your post-retirement tax bill.
- Liquidity: You need a portfolio with sufficient liquidity to access the cash you need when you need it. You can do this through fixed-income investments or periodically raising cash by selling appreciated equity investments.
- Volatility management: Portfolio volatility is a bigger concern when investing in retirement. Retirees don’t have the time to recover from negative investments. Therefore, managing volatility in your portfolio and avoiding highly volatile, risky investments is not advised.
Managing portfolio risk during retirement
As a retiree, you face two main risks: your portfolio loses value (market risk), or you run out of money before you die (longevity risk). You can minimize portfolio volatility with low-risk investments. Low-risk investments after retirement include bonds, treasury notes, and CDs.
Understanding market volatility
Understanding and managing market volatility is key to maintaining a post-retirement portfolio. The best way to mitigate volatility is to diversify your assets within and across different market sectors. This will allow your investments to react differently to significant market events.
For example, you shouldn’t only invest in industrial companies since it makes you vulnerable to market downturns. Instead, you’re better off diversifying your portfolio across multiple market sectors, including energy, industrials, financials, and technology.
In addition to diversifying your portfolio, make sure to regularly rebalance your asset allocation to ensure you’re on track to meet your goals and align with your risk tolerance.
Adjusting your risk tolerance over time
As you near retirement, financial experts recommend adopting a more conservative investment strategy. In short, this means prioritizing low-risk investments that yield potentially lower returns, such as corporate bonds, treasury notes and bills, CDs, and dividend-paying stocks.
Investors in their 60s typically focus on these safer options compared to younger investors in their 20s who typically invest in riskier stocks, mutual funds, and volatile assets like cryptocurrency. As you get older, money retirement investment advisors (RIAs) and robo-advisors will begin automatically adjusting your asset allocation to be more conservative in order to protect your portfolio.
Generally, post-retirees should avoid high-risk, higher-yield investments as they don’t have the time to recover from potentially significant losses. All investments pose some level of risk, but low-risk assets like bonds and treasury notes are less likely to fail.
Investment options for retirees to maximize income
Continuing to invest during retirement is necessary to hedge against inflation and ensure long-term savings for the duration of your post-work years. When you can retire and how much you need to save largely depends on your income needs, lifestyle, and your personal financial situation.
Here’s how to maximize income in retirement with income-generating securities like dividend-paying stocks, bonds, and CDs.
Dividend-paying stocks and funds
Dividend-paying stocks and funds are popular, low-risk investments for retirees to generate regular income. After purchasing a dividend-paying stock, the company in which you hold shares will distribute a portion of its earnings to all its shareholders, often quarterly or annually.
“When allocating to equities within a retiree’s account, it is important to focus on high quality, mature companies with competitive positions within their industries, reasonable valuations, and growing dividends,” says Brad L. Cast, RFC, wealth manager and partner at Merit.
Cast recommends that post-retirees purchase shares from companies with a history of regular, high dividends as this can serve as a source of income regardless of the stock’s current valuation.
However, dividend payments are not guaranteed since a company can stop paying or change the payout amount at any time. Retirees who pair dividend-paying stocks with annuities or other income-generating investments will have the most luck generating passive income.
Annuities and their benefits
Annuities have developed a bad reputation as being fee-heavy and full of fine print. However, their ability to provide a guaranteed source of lifetime income in retirement should not be overlooked. The key is determining what type of annuity will best meet your retirement needs (deferred, immediate, fixed, or variable).
“While illiquid investments and products like annuities may have a place in your portfolio, they should not be the entirety,” Harper says. Like CDs, annuities cannot provide the growth a retirement portfolio needs to keep up with inflation.
Certificates of deposit
A certificate of deposit (CD) is a type of savings account where you agree to lock up your money for a period of time in exchange for a fixed interest payment. When you redeem your CD, the bank gives you your original deposit back plus the interest you’ve earned.
CDs are considered one of the safest investment options since they are not subject to market fluctuations. CDs can be good for retirees since they are low-risk and offer a stable income stream. The downside is that the rates offered can be low (see the best CD rates today) and may not keep up with inflation. Generally, it’s best to pair CDs with more growth-oriented options to help combat longevity risk.
Bonds
Bonds are common fixtures in retirement portfolios thanks to their reliable income.
“While it’s true that yields have been anemic for quite some time,” says Casey, “the fact remains that bonds issued by high-quality companies and held to their maturity date will provide needed, regular income while reducing overall portfolio risk.”
A common retirement investing strategy is creating a “bond ladder” where you hold multiple bonds with different maturities. As old bonds mature and the principal is repaid, you can use the proceeds to buy new longer-term bonds to create a steady stream of income and mitigate the risk of interest-rate changes.
Tax considerations for investments during retirement
Taxes can diminish potential gains during retirement. One strategy for tax-efficient investing for retirees is to strategize when you should start taking withdrawals and the tax implications of different investment accounts.
You may have to pay tax on your withdrawals during retirement, especially if you’re withdrawing from a traditional 401(k) or IRA. You aren’t required to start taking distributions until age 73, and failure to make your required minimum distribution (RMD) can result in a 25% penalty of the amount not withdrawn.
Although you don’t have to start making withdrawals until then, consider withdrawing sooner if you are currently in a lower tax bracket than you expect to be when you’re required to start taking RMDs. This is a great way of minimizing taxes.
You won’t pay income tax on Roth IRA and 401(k) withdrawals as long as you’re at least 59 1/2. However, you may be subject to income on your monthly Social Security checks depending on your income. In 2024, individuals with a combined annual income of $25,000 or more will have up to 85% of their Social Security benefits subject to income tax ($32,000 for married couples).
One way of potentially avoiding taxation on your Social Security benefits is by delaying receiving your benefits until your income is under $25,000 (or $35,000 for married couples). But depending on individual situations, this may not be feasible.
Investing post-retirement FAQs
It is important to invest after retirement to ensure that your savings continue to grow and generate income to support your lifestyle. It helps protect against inflation, manage healthcare costs, and provide financial security throughout your retirement years.
The safest investment options for retirees include bonds, dividend-paying stocks, CDs, and annuities. These investments typically offer lower risk and provide steady income streams for retirees who don’t have the time to recover from large losses in their portfolios.
Retirees can balance risk and reward by diversifying their portfolios across different asset classes, such as stocks, bonds, real estate, and cash. It’s also crucial to regularly review and adjust your portfolio based on market conditions and changing financial needs. Investing in low-risk, incoming-generating investments like dividend-paying stocks and annuities can provide steady income and hedge against inflation.
The best strategy to protect your retirement savings from inflation is diversifying your investment portfolio with low-risk, income-generating investments such as bonds, dividend-paying stocks, annuities, and CDs. While you probably won’t generate high returns, you can still moderately grow your wealth to prolong your savings during retirement.
Retirees should consider the tax implications of different investment accounts, such as traditional IRAs, Roth IRAs, and 401(k)s, managing withdrawals to minimize tax liabilities, and understanding RMDs.
