Now That You're Retired, Maximize Your Retirement Income
Although much of the last decade has been an exception, historically, stock returns have outpaced inflation by the widest margin and have provided the strongest returns over the long term.
Those long-awaited golden years have arrived, and you're enjoying a well-deserved retirement. You've saved and invested wisely to provide a financial cushion. Where do you go from here?
Factor in Inflation
You may want to start by considering the impact of inflation. With longer life expectancies, the need to finance ongoing living expenses, and the requirement to take annual distributions from retirement accounts, you'll want to be sure your returns exceed the rising cost of living. Even at a moderate 3% rate, inflation can substantially cut the purchasing power of your savings over 20 years. A balanced portfolio of investments to maximize security while building needed profitability may be crucial to your financial well-being.
Keep Stocks Working for You
Many people believe that retirement investing means allocating everything to investments that present little risk to principal, such as money market accounts or certificates of deposit. While the vast majority of these investments historically have not lost value, you should also consider the risk that long-term returns may not keep pace with inflation.
Historically, stock returns have generally outpaced inflation by the widest margin and have provided the strongest returns over the long term. Depending on your risk tolerance, you may want to consider keeping a portion of your portfolio invested in stocks and stock mutual funds throughout your retirement.1
A Focus on Yield
Along with some stock investments, a significant portion of your principal will likely be invested in fixed-income investments to provide a consistent stream of income. How much risk (maturity and credit risk) you need to take in these investments depends in part on how much income you need.2
Government bonds of varying maturities and coupon rates typically are available to match your projected cash flow needs. You can buy bonds maturing (meaning principal will be repaid) in one, two, and three years based on your expected cash needs in those years. You'll earn the stated rate of interest and likely have little risk of loss of principal, since you shouldn't need to sell the bonds before the scheduled due date. The rest of your bond portfolio may be invested in higher-yielding, longer-term investments.
Your Retirement Distribution
For many people, retirement is also a time to elect required minimum distributions (RMDs) from company pension and retirement savings plans, IRAs, or annuities. Because these distributions often involve complex analysis of income and tax scenarios, it's wise to consult your financial advisor.
Currently, withdrawals from traditional IRAs must begin no later than April 1 following the year you turn 70 1/2. After that, you must make annual withdrawals by December 31 each year.
If you have substantial assets that generate more income each year than you spend, consider sheltering some of your investments in an annuity. Your investment earnings will grow and compound tax deferred until withdrawal, when they are taxed as ordinary income. Because annuities may impose fees and surrender charges, study them closely to determine whether they are appropriate for you.
When building a portfolio that is appropriate for your particular circumstances, and deciding how much should be allocated to each asset class, consider your risk tolerance and your need for income versus growth. Your financial advisor can help you find the right balance.