Money and Retirement - Investments in Retirement
Investing in retirement is no different than investing for retirement.
You determine your appropriate risks and term of investment, then create a
portfolio that allows you to meet your goals. The only difference is that
you need to plan on liquidating assets during retirement, so you should always
have plenty of money in a short term, stable, liquid asset that you can use to
make withdrawals. Also, there is some account planning that you need to do
to ensure that you are tax optimized and in compliance with any retirement plan mandatory
withdrawal rules.
The Right Investment Mix. Some people think that when they
retire they should sell all their stocks and own only bonds and CDs or money
market funds. This is not true, especially if you are retiring early.
Remember, you are investing your money until the end of you and your spouse's
life, not until you retire. The younger you are the more exposure you
should have to stocks. Finding the right mix for you will be different
than for other people because you have different accounts, risk tolerances,
spending patterns, etc.
I'm sure you've heard the age old adage that if you subtract your age from
100, this is how much stock you should own. So if you are 50 you should own
(100-50) 50% stocks. Although this may be okay for some, if you are 50 and
have 30-50 years to invest for, why would you only own 50% in stocks?!
Different money managers and financial planners will give you different ratios
to own, but in our opinion, if you have more than 25 years to invest, you don't
need to own many bonds or cash account yet.
Perhaps the most important thing to look at in your retirement investments is
the diversification. When putting your portfolio together, make sure that
you are well diversified. Invest across different market caps (large,
medium and small), across different sectors (technology, materials, real estate,
health care, oil, retail), different regions (US, Asia, Europe, South America),
different risk markets (developed and emerging markets), and across different
growth stocks (dividend, income, growth).
Managing Your Retirement Accounts. You'll have to be
aware of tax implications and mandatory distributions. For example, if you
are 60 and retired, you can withdraw money from your non-retirement accounts
without having to pay any income taxes (except for any capital gains).
However, when you withdraw money from your 401k or traditional IRA, you'll have
to pay income taxes on the entire amount of withdrawal. Also, when you hit
70 1/2, you'll have to start making minimum withdrawals from your 401K and IRA.
Make sure that you invest each account accordingly to maximize the tax
implications of these withdrawals.
For example, if you are 60 years old and won't need to withdraw from your
401K or IRA until you are 70 1/2, then you should have the 401K and IRA invested
in faster growing investments, so that they can grow tax free for the next 10
years. And you should keep the cash you'll need for the next few years
invested in safe money market, savings, or CDs in your non-retirement accounts.
That way you won't need to pay as much tax on the earnings because your higher
return investments will be tax deferred and only your low rate of returns will
be taxed.
You should also study social security benefits closely to determine when you
should start claiming them. The longer you wait, the higher the monthly
payments will be. If you are in good health and don't need the money right
away, it probably makes sense to forego the payments until the future.
This will also help lower your taxes because social security payments are
taxable.
So, in summary, to find the best investments for your retirement, invest your
money at a risk level that you are comfortable with, and remember that it is
just as important to manage your retirement and non-retirement accounts as it is
to manage your retirement money.
