Imagine you’re just embarking on a long-distance bicycle trip. You’ve trained for months, carb-loaded for the past couple nights, and planned ahead for any obstacles or slow-downs you might encounter. You’re feeling confident!
But 24 hours in, the fatigue sets in. You’re over halfway to your destination, but your muscles are sore, your snacks are running low, and you feel the twinge of a dehydration headache.
It’s time to conserve what you have left—and maybe switch gears—so you can finish strong.
That’s important to do as you approach or enter into retirement, too. Your investments, like your energy and water supply on a long-distance race, need to last throughout your retirement years. When it comes to investment after retirement, it’s crucial to adopt a more conservative investment strategy to protect and preserve your savings.
Types of Income in Retirement
Retirement planning means knowing where your sources of income in retirement will come from. Here are the types of income we typically plan for:
1. Social Security
Throughout your career, you have been paying 12.4% of your income into Social Security. Over the course of your time in the work force, that’s a significant investment!
How significant? Well, you can get an estimate of your future benefits from the Social Security Administration here. That should give you an idea of how much monthly income you can count on from Social Security.
Now, there are over 2,700 rules that apply to how you take your Social Security benefits, so it’s important to work with an experienced financial advisor to make sure you’re getting the most out of them.
A pension is an investment portfolio that some companies offer as an employee benefit. The employer funds this investment—usually a percentage of the employee’s salary. After a set amount of time, the employee becomes “vested” and is eligible to receive the benefit.
Now, according to the Pension Rights Center, only 31% of current retirees enjoy the security this particular investment provides.1
3. Other predictable income
Here at Beacon, most of our clients are either approaching retirement or already retired. That means keeping all of their money in a volatile market isn’t a smart option. At this stage of life, we want predictable income.
A financial advisor can help you create a written plan for your income in retirement. That income plan will detail all your predictable sources of income, which—depending on your situation—may include:
- Required Minimum Distributions (RMDs) from your retirement investments, like IRAs and 401(k)s
- Fixed annuities
- Rental property income
- Treasury bonds
- Preferred stocks
Once you know where you’re sitting based on your overall portfolio, you can make some adjustments; just as you would on a long-distance bike ride. The closer you get to your destination, the more you need to pay attention to your resources.
Ways to Adjust Your Investments After Retirement
Once you’ve reviewed your expected income sources, it’s time to make sure everything is in the right place. Here’s what you can do:
Review Your Risk
As we’ve discussed, approaching retirement means shifting gears. Your mindset should go from accumulation to conservation.
Earlier in your working years, you may be more comfortable with volatility and willing to take on higher-risk investments for potentially bigger gains. If the market takes a nosedive, you’ll have plenty of time to recover and get ahead.
But eventually, you’ll need to actually use those invested funds. As that time nears, you shouldn’t keep all or most of your money in the market, susceptible to that same volatility. You’ll want to look into conservative investments that provide more stability.
So, as of today, do you know how much risk you’re actually taking on? Or what an appropriate amount of risk is for you at this stage? Do you have questions about more conservative investments and how to protect your nest egg? Get in touch with one of our advisors for a free Risk Analysis today.
Move to Conservative Investments Near and During Retirement
So, which investments are conservative, predictable, legitimate, and recommended just before, during, and after retirement?
One example is a fixed index annuity. (While annuities often spark controversy, it is worth acknowledging that a pension is a form of annuity.)
In his book, “Money: Master the Game,” Tony Robbins calls annuities “income insurance.” That’s because an annuity provides a sum of money paid to someone each year for a predetermined amount of time—typically for the rest of their life. You can think of it like a steady paycheck you get throughout retirement until you pass away.
Another good example would be bonds. Bonds involve lending money to the government or a company in exchange for regular interest payments and the return of the principal amount at maturity. Government bonds, municipal bonds, and high-quality corporate bonds are generally considered lower-risk options. They provide a fixed income stream and have historically exhibited lower volatility compared to stocks.
While these couple examples are generally considered conservative options, all investments carry some level of risk. Don’t put your money into something without considering your individual circumstances and consulting with a fiduciary financial advisor to determine the most suitable investment strategy for your retirement needs.
Diversify Your Income Sources
Depending on just one income stream, like Social Security, bonds, or a pension, will leave you vulnerable to unforeseen changes. A better approach is to diversify your income sources with a portfolio that includes bonds, real estate, and dividend-paying stocks. Diversification can help mitigate the risk of relying on a single source of income in retirement.
Implement Different Tax Strategies
If taxes made your head spin during your working years, just wait until you have to deal with them in retirement! The good news is optimizing your portfolio for tax efficiency is one of the best things you can do for your income plan. An experienced financial advisor can help you understand your options, take advantage of the current low tax rates, and make sure your retirement assets are aligned in a tax-efficient manner.
Take advantage of our free Tax Savings Analysis to minimize the taxes you pay in retirement.
Create a Sustainable Withdrawal Plan
This is probably the most important thing you can do as you approach retirement: Develop a well-thought-out withdrawal strategy for your retirement savings, adjusted for inflation. Our fiduciary advisors can help you create a personalized withdrawal plan to make your income last throughout your retirement. If you have $250,000 or more saved for retirement, we offer you this plan at no cost and no obligation. You can take a look at our projections, and even take this plan to your current advisor. When it comes to your financial future, getting a second opinion is never a bad idea.
Types of Income in Retirement
What do you see at the end of your journey?
If it feels like the long-distance bike trip we started with here, you’ll probably be ready to take your feet off the pedals, sit back, and relax. Maybe get a massage and a cold glass of sweet tea, and catch up with the family and friends who were cheering you on the whole way.
Whatever your dream is for your retirement lifestyle, you deserve to enjoy it. We’d love to help you get where you want to go. With some careful planning and investing, you’ll have the peace and confidence to enjoy the view along the ride.