So much personal-finance and investing advice deals with how to save and invest for retirement. However, it's just as important to know how best to invest your money when you're in retirement. After all, once you retire, you'll still have a portfolio to manage, and you'll need it to continue performing so it lasts just as long as you do.
Think about it. Few of us have pensions anymore, and Social Security won't provide most people enough to live comfortably on -- the average monthly benefit was $1,331 per month as of February, or about $16,000 per year. Therefore you'll depend on your own retirement savings to keep you comfortable and financially secure.
Meanwhile, if you retire at 65 and live as long as the average retiree, then you'll need your nest egg to last you about 20 years. Over that period of time, inflation can put a serious dent in your retirement savings. For example, if your savings were not invested and therefore did not grow at all, inflation of 3% per year would cut your nest egg in half over the course of 25 years.
Clearly, then, it's best to invest your money in retirement so that it grows at least enough to keep pace with inflation.
When it comes to how you should invest your money in retirement, your choices are largely the same as they are before retirement, only with some twists.
For example, stocks, bonds, and CDs remain major contenders for your money, but the older you get, the more bonds or safer investments you may want to hold. When you have several decades ahead of you, the volatility of the stock market isn't an issue; if the market crashes, that can actually be a good thing, providing you some great bargains for your new investment dollars. You'll have time to wait the downturn out and see your assets start growing again.
But when you're living off a nest egg in retirement, you want to keep your short-term assets -- those that you'll need to withdraw within the next three to five years -- accessible and safe from inevitable market crashes. So consider not only bonds (which can fall in value), but CDs, money market accounts, and even savings accounts. Right now the interest these options offer is generally meager, but that's not always the case.
Your long-term assets, meanwhile, should be invested largely or entirely in stocks, because over long periods, it's hard to beat the performance of the stock market. The stock market has averaged close to 10% annually over the long haul, which, after accounting for inflation, would still leave you with close to a 7% average annual gain. Not bad, eh?
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So what kinds of accounts should you invest with in retirement? Well, if you're no longer working full-time, you won't be able to add money to a 401(k), but as long as you're earning some income, you can contribute to an IRA. And even if you're not adding any money to your savings in retirement, you'll likely still want to manage them, keeping up with the progress and performance of the stocks and/or funds that you hold in them.
Remember that once you turn 70-1/2, you'll have to start taking required minimum distributions from traditional IRAs and all employer-sponsored retirement plans (unless you're still working for the company that sponsors the plan) -- including Roth 401(k)s. Roth IRAs, though, are a different beast, with no minimum distributions required during your lifetime.
As you get older, you may have less interest in keeping up with your holdings -- and perhaps even less ability to do so. Thus it can make a lot of sense to simplify your holdings by simply owning some index funds instead of stocks or managed mutual funds. Simple, low-cost, broad-market index funds include the SPDR S&P 500 ETF (NYSEMKT:SPY), the Vanguard Total Stock Market ETF (NYSEMKT:VTI), and the Vanguard Total World Stock ETF (NYSEMKT:VT), which, respectively, have you invested in 80% of the U.S. market, the entire U.S. market, and nearly all of the world's stock market.
Another great way to simplify your financial affairs is to spend a big chunk of your nest egg on an immediate fixed annuity, which can then send you monthly checks to live on for the rest of your life. As an example, a $100,000 premium can buy a 70-year-old man about $630 per month, or $7,500 per year. A $300,000 purchase can generate more than $20,000 annually. You can also generate significant income via dividend-paying stocks. These are less guaranteed than an annuity, but they allow you to retain control of your money, and they can offer capital appreciation as well as steady income.
Finally, be sure that you have an estate plan in place. That includes a will, a durable power of attorney, a living will, an advance medical directive, and perhaps a trust or two to protect various assets and pass them down to your heirs in the way that you want. Consult an estate-planning pro or read up on the subject to see what might make sense for you.