As you head toward your professional finish line and cruise into retirement, you might think it’s time to get your money out of the market and into your mattress. After all, those funds have to last you for decades, right?
The truth is, as long as you don’t need that money in the next few years, cashing out is likely the wrong choice.
Continuing a course of smart investing throughout your retirement will take you far, whether you’re shopping for a mansion in Tuscany or simply want to sit back and relax.
But, as is always the case in investing, there are risks.
So, what is the safest way to invest for income in retirement? Here are some strategies designed to minimize risk and maximize your returns.
Okay, we know you’re sick of hearing it, but it’s always worth remembering: Don’t put all your eggs in one basket.
We’re big fans of portfolio diversification for all investors, retirees included.
Even though your asset allocation will vary depending on whether you are a future or experienced retiree, remember that diversification — including stocks of all sizes and geographies, bonds, cash, and alternatives such as REITs – is critical.
If you’re one of our Rule Your Retirement members, check out this page for a model retirement portfolio. And if you’re not, you can become a member today and we’ll help you figure out which allocations are best suited for you.
2. Choose safe, income-producing investments
Most retirees are looking for financial stability. After all, when you’re retired, you’re probably more focused on protecting your nest egg than getting crazy-rich.
This is why we Fools recommend that older retirees build portfolios with allocations to things like money markets, Treasuries, certificates of deposit, and corporate bonds, as these typically provide greater stability and lower risk than stocks.
If you’re not quite there or are in the early stages of your retirement, consider holding onto more of your stocks. Even though the safety of cash and bonds may seem appealing, if you don’t plan to access the money within the next five to seven years, stocks are the place to be.
Not only will they help you beat inflation, but they’ll most likely have higher return rates, too. (According to Jeremy Siegel’s Stocks for the Long Run, for every rolling five-year investing period since 1802, stocks outperformed bonds a whopping 71% of the time!) You may need that growth to make sure your portfolio lasts as long as you do.
But when you retire, you rely on your portfolio to replace your paycheck. This means that as you age, you might want to consider investing less in stocks and more in safer options, such as bonds and bills.
Here at The Motley Fool, we recommend this easy rule of thumb:
Take your age and subtract it from 110, and then allocate that percentage of your portfolio to stocks.
Pretty straightforward, huh?
3. Pick your stocks wisely
So, if bonds provide more stability than stocks, why shouldn’t older retirees just forget about stocks completely?
Well, even though bonds are typically lower-risk investments than stocks, this isn’t always the case. When interest rates rise, investors demand a higher return on their investments. This leads to a drop in the value of existing bonds, so if you have to sell, you could end up losing money.
As Fool Matthew Frankel discusses in this article, the key is investing in the right kind of stocks—for instance, large-cap stocks.
One of the main upsides of owning stock in large caps (companies with market capitalizations greater than $10 billion) is that they typically pay higher dividends than most other companies … which is nice if you are retired and relying on your portfolio. And since dividend payments tend to increase each year, they can provide you with some protection against inflation.
Most importantly, however, large-cap stocks generally aren’t as volatile as stocks with smaller market caps. Due to their size and longer track records, they don’t tend to drop as much as smaller companies when the stock market tanks. Also, bigger, more established companies are less likely to collapse and go bankrupt than small up-and-comers.
We’ve got more answers.
Check out our webinar, “1 Great Retirement Strategy You Can Use Today,” for a simple income-generating tool that’s ignored by too many retirees, plus a free, personal copy of “Your Financial GPS – A Roadmap to Riches.” (Note: you’ll need to sign up for Stock Advisor to access that report, but you have 30 days to cancel for a 100% refund if you don’t love the investing service.)
For additional tips on how to make your retirement as easy as possible, get started with your very own Rule Your Retirement membership. Whether you want to learn how to build a portfolio that will last, how to set up an IRA or 401(k) account, or simply how to develop a comfy “income cushion,” we’ll help steer you in the right direction.
— Answer provided by Motley Fool intern Caroline Jennings