The path to retirement is often a tale of two stories.
When entering the workforce our perception is that of a path that's pretty straight and narrow. Getting from Point A to B involves saving, investing, and retiring on a sandy beach with mimosas when we turn 65.
But, oh how things change.
Along our often four-decade-plus work history we run into a number of twists and turns that alter our vision of a straight and narrow path from Point A to B into something of a rollercoaster ride. Going to and paying for college, starting a family, buying a home, or dealing with an unexpected medical expense, are all reasons why our plans to save and invest could be altered or completely put on hold.
Eventually, though, most of us will reach our goal of crossing that personalized finish line and hanging up our work gloves for good. But as many new retirees soon realize, the behind-the-scenes work doesn't stop there. Investing for your future is a lifelong endeavor that can, and should, extend well past the point where you leave the workforce. Let's look at three reasons why investing long after you retire can be such a critical decision.
1. Life expectancies are on the rise
To begin with, life expectancies in the United States, and for that matter most countries around the world, are on the rise. Since the mid-1960's life expectancies in the United States have risen from about 70 years to an average of nearly 79 years. This means the average retiree at 62 today could easily spend two decades being retired thanks to improved health education and medicines. It's possible that millennials and Generation Z could live even longer.
Retirees also need to factor in what inflation can do their money over time. Sure, putting money under your mattress (in the literal sense) protects that money from losing nominal value, but it does nothing to protect your nest egg from the effects of inflation. If the price of goods and services increases at a rate of 3.5% annually (which is roughly the average rate of inflation over the past 100 years), your money will be "worth" only half of what it is today in 20 years.
2. Social Security uncertainties
Social Security benefits represent another cloud of uncertainty for retirees -- both current and those still working and planning to retire within the next 20 years.
As it stands now, the Social Security Trust is forecast by the Trustees' Board to burn through its excess cash reserves by 2035. The reason the Trust Fund is expected to see its cash inflow turn into a cash outflow is twofold. First, people are living longer than ever, and are thus able to collect a benefits payment for a longer period of time. The other issue here is that baby boomers are retiring in greater numbers, leading to a drop in the worker-to-beneficiary ratio. In plain terms, the Social Security program is less than 20 years away from potentially critical changes that could include benefit reductions.
The Social Security Administration has suggested that benefits are only designed to replace about 40% of a person's working wage come retirement. If this figure is cut, it'll be imperative for retirees to have other sources of income generation handy.
3. Rising medical costs
Another major problem for seniors is the rising cost associated with receiving medical care and drugs.
An analysis on prescription drug prices released by healthcare data company Truveris in January shows that drug costs spiked across the board in 2015. Branded drug prices jumped 14.8%, specialty drug costs rose 9.2%, and even generic drugs increased by nearly 3%. All told, average drug costs jumped more than 10% in 2015. Drug costs have historically outpaced the rate of inflation and wage growth, but this is above and beyond the norm that retirees are used to.
Making matters worse, the Medicare Hospital Insurance Trust is in the same predicament as the Social Security Trust, only it's set to exhaust its cash reserves by 2030. It's quite possible that as medical costs rise the federal government could look to push some of these costs back to seniors in the form of monthly deductibles or copays. Now more than ever retirees need to be prepared for higher-than-anticipated medical costs in their golden years.
In addition to the above points, although it might not be considered "critical," giving your immediate family a head start with a potential inheritance, and staying involved with your finances in order to keep your mind focused and active, could be added drivers that keep you motivated to invest well after you retire.
Invest wisely, even in your golden years
Investing during your golden years is clearly important, but you also don't want to take unnecessary risks when living off of your nest egg. Here are a couple of strategies to consider that could help generate income and/or protect your assets.
For starters, a Roth IRA can be particularly helpful before and after retirement when it comes to reducing your taxable income. As long as you meet the income requirements to contribute to a Roth, the money you invest (which maxes out at $6,500 a year for someone aged 50 and up) can grow completely free of taxes.
The advantage of a Roth IRA is particularly felt if you begin investing in your early 20s and let your investment grow over the course of four-, five-, or six-plus decades. Best of all, Roth IRAs have no contribution age limit or minimum withdrawal amount, so you remain in complete control of when you want to take funds (as long as it's not until after age 59-1/2, or it's for a qualified exemption prior to that age).
In terms of investments, high-quality dividend paying stocks are almost always a smart addition. In particular, master-limited partnerships (MLPs) and real estate investment trusts (REITs) can be a wise move for retirees. MLPs and REITs typically have market-topping dividend yields, and the payments from REITs and MLPs simply reduce a unitholders' cost basis. In easier-to-understand terms, you only pay tax on the payouts received from MLPs and REITs when your cost basis equals zero (i.e., you've recouped your entire investment via dividend payments), or when you sell your position. This can be particularly helpful to retirees who may be trying to avoid paying a lot in taxes each year.
Exchange-traded funds, or ETFs, are another potentially wise move for retirees. Instead of dealing with individual stock risk, retirees can buy baskets of stocks that act like mutual funds but are just as liquid as a stock. High-dividend ETFs, multi-asset ETFs, and preferred share ETFs are some ideas that I would encourage retirees to examine.
Retirement is what you make of it; so ensure it's a good one by continuing to build your nest egg throughout your lifetime.