Properly managing your investments in retirement is crucial for ensuring your overall financial health. Managing retirement investments can help you to preserve your assets, minimize your tax burden, ensure that you have enough income to cover retirement expenses, and preserve your wealth for future generations.
Managing your retirement investments also means taking your retirement goals and plans into account, whether you dream of traveling the world or are excited to spend more time at home with family and friends.
Because everyone’s retirement situation is different, there is no one-size-fits-all approach to managing investments in retirement. That said, there are a few key approaches to keep in mind. Here are a few investment strategies to consider in retirement.
Understand Changing Risk Profile (and Corresponding Allocations)
Your investment goals, time horizon, and most importantly your risk tolerance will all likely shift in retirement. Because you’ll need to access retirement investment funds to cover living expenses in retirement, your risk tolerance may decrease. Ask yourself:
- How much risk are you comfortable taking in your portfolio?
- How will you react to a market downturn and are your investments equipped to handle it?
- Have your investment goals changed?
You should also examine your risk necessity and risk capacity. Risk necessity describes how much risk you need to take on to accomplish your goals. Risk capacity describes whether you can afford to take risk considering your current financial situation. Even though you might be an avid risk-taker well into retirement, your goals and values may not require the risk you tend to take. It’s essential to balance these initiatives to create a strategy that works for you in your golden years.
Because your risk tolerance changes in retirement, your portfolio allocations could also shift. Should you invest in more fixed-income sources? Do you have enough equity securities for a strong portfolio? You should work with your advisor to find the right mix of allocations for you.
Keep Taxes Top Of Mind
Investing and taxes go hand in hand, and tax planning is critical for retirement. By properly managing your tax burden, you can protect your assets from unnecessary tax penalties. Strategies to help reduce your tax burden may include,
- Asset location (housing securities in the most tax-efficient accounts)
- Tax bracket management
- Medicare IRMAA
- Prioritizing long-term capital gains.
Proactive tax planning can help you to come up with a comprehensive tax strategy in retirement.
Taxes tend to impact your retirement investments most when you start to take them out, making a carefully planned withdrawal strategy critical. Without a plan for asset distribution, you could wind up paying much more in taxes than is necessary.
You should build a plan that takes your full income picture into account. Your withdrawal strategy should consider your retirement expenses and goals, while also minimizing taxes and prolonging the life of your retirement funds. Properly managing your withdrawals can save you thousands of dollars per year, so you should be sure to consult with a tax professional before making any changes.
Protect Your Portfolio Against Inflation
Inflation can be harmful to many retirees since several retirement income sources don’t account for it (except for the cost of living increase via Social Security). Your portfolio should be built to withstand inflation, which means diversifying your investments and prioritizing growth that is above the annual inflation rate.
To accomplish this, you should consider investing in a diversified portfolio of stocks, bonds, and real estate combined with short-term investments like cash and savings. By diversifying your portfolio, you can protect yourself both against inflation and against investment risk, which can help to make sure that your nest egg is safe in retirement.
Create New Investment Goals
Your goals should always drive your financial plan. And since no two retirees’ goals are alike, your investment plan may look very different depending on what you choose to prioritize.
Before coming up with an investment plan, you should take a few minutes to consider your goals for retirement. Maybe you want to pay off debt, purchase a vacation home, or travel the world. Or maybe you want to spoil your grandkids and leave an inheritance for children and other family members.
Getting excited about the next phase of your life and being intentional about how you want to use your time and assets in retirement can help you and your financial advisor to come up with a successful financial plan for your golden years.
Work With A Trusted Advisor
When it comes to retirement planning, it’s important to work with a trusted advisor. That said, not all advisors are alike. You should be sure to work with a retirement planner who can help to guide you toward this next phase in your life. It’s also important to work with a fee-only fiduciary advisor who can provide unbiased advice with your best interest at heart.
We have extensive experience serving retirees and helping them build wealth plans that achieve their goals. If you have questions about retirement planning and creating an investment plan to achieve your goals, we’d love to hear from you. Contact us today to learn more!