Investing in retirement can be stressful.
Even with a retirement cheat sheet to help guide your decisions, it's often hard to know if you are doing what you should to preserve your nest egg.
That's why it's important to create an investment strategy tailored to your goals. But, there is a lot of information out there which can make it hard to know what information you should trust.
A strategy that is great for your neighbor or colleague may be terrible for you.
The good news is that there are four key considerations everyone should consider when transitioning to and through retirement.
Take your retirement investing up a notch. Here are four ways to help you invest better in retirement.
1. Know Your New Risk Tolerance
Do you feel like your mood fluctuates with the amount of money in your account? Are you up when your account is growing and down when you see your balance fall? That’s normal, but to a large extent, those feelings can be managed with proper investment planning.
Temporary Decline or Permanent Loss? Often, It’s Up To You.
The first thing retirees should realize is that there is a consequential difference between a temporary decline and a permanent loss. Your behavior drives much of this distinction.
Many people conflate and confuse investing and gambling. Without a plan tailored to your goals, risk, asset allocations, time horizon, and more, you may think that you’re investing, when you’re simply gambling with the stock market. As a result, your approach puts you at an increased risk for permanent loss.
For example, if you concentrate too much of your savings on one investment (say a popular individual stock), you could see more significant swings in your portfolio. If those fluctuations cause you too much stress, you could end up selling in a panic— turning what could have been a temporary decline into a permanent loss.
Strong investment decisions take a more balanced and strategic approach.
Knowing your risk tolerance and taking prudent risks for your situation can help. Spread your investments across many different companies, economic sectors, markets, and securities (a.k.a diversification) so that you only expose yourself to the risk that’s appropriate for your needs.
We can work with you to determine the right mix of allocations that suit your risk appetite. It’s our goal to help you balance getting a good night’s sleep and putting yourself in the position to generate the best potential long-term returns.
What’s The Right Amount of Risk for Your Portfolio?
To determine the right mix for you, it’s helpful to think about your risk comfort level in terms of hard dollars. Say you have a $1,500,000 investment portfolio. Think about a decline that would make you pretty uncomfortable. You might be alright with a temporary decline of $250,000 but not $300,000. Those numbers give us an even better idea of how to balance your investments.
This number will fluctuate over time, too. As you get closer to retirement and your focus shifts from accumulating savings to withdrawing, then the risks, and your risk appetite, both change. It’s important to update your portfolio to match.
Want to see if your portfolio is up to snuff? Check out our free portfolio check-up resource. This resource will help you determine the right mix of investments for your unique situation.
2. Be Cognizant of Inflation
Inflation is a constant but somewhat silent risk to retirement. It’s like the kryptonite of retirement investing. Some of your retirement income may provide automatic inflation protection such as the Social Security inflation adjustment, but not all sources do.
Even so, sometimes the increase in elements like Medicare premiums may overshadow the increase in Social Security. But, you can protect yourself from inflation risk with your investment plan by seeking investment options that consider inflation.
It’s important to design a portfolio that protects you from inflation and rising interest rates because you rely on it for income. A few specific ways you can do that include:
Your choice of bonds and other fixed-income securities. For example, the value of long-term bonds will fall significantly when rates rise. You can either hold individual bonds until maturity or invest in shorter-term bonds.
Diversify asset allocations across borders as well as asset classes. If inflation is worse in the US than in other parts of the world, then the US dollar may decline in value relative to other currencies. Holding international stocks can help offset the decline in the dollar. Diversification is always critical, but it's especially important for your retirement nest egg.
Create an intentional investment portfolio with a range of securities—mutual funds, exchange-traded funds (ETFs), index funds, real estate investment trusts (REITs), cash, and more. Our team can help you create an intentional portfolio designed with your needs in mind.
Your portfolio should be designed to weather most market environments including rising interest rates and inflation.
Building an intentional portfolio that offsets risk better insulates your retirement savings for the future. Inflation is an important risk to understand and plan for in retirement.
We can help you take inflation and interest rates into account with your investment plan.
3. Create A Strong Tax Plan
It's no secret that we love tax planning here at Covenant Wealth. It's one of the foremost ways to insulate your retirement nest egg, preserve the longevity of your retirement accounts, and increase the income you can take for your savings. It’s also one of the least risky.
Key tax considerations include:
Medicare Income-related monthly adjusted amount (IRMAA)
Long-term capital gains
Federal tax bracket management
Lowering your taxable income to qualify for subsidies that pay for healthcare in retirement.
You'll also need to get clear on where your money is held—individual retirement account, brokerage account, savings account, etc.— to make the most of every dollar.
Another powerful strategy that you can use pre and post-retirement are Roth conversions. Roth conversions allow you to take advantage of lower tax years to create a tax-free bucket that you can withdraw from in higher tax years. It converts funds from your traditional IRA to a Roth IRA. This strategy is inherently a multi-year strategy, so we need to think past a single year’s tax return.
4. Set Intentional Investment Goals
Investing should be about achieving a purpose rather than chasing aimless gains. Your investment plan should be grounded in your retirement goals, values, and priorities.
Set intentional goals. Ask yourself,
What are your retirement goals?
Will you spend more on vacation in the early years and less in the later years as you age?
Do you want to buy a retirement house on the beach?
Is investing in your grandchild's education important?
Are you funding a trust?
Do you want to pass down a Roth IRA?
What about charitable giving?
Your goals are critical for several concrete reasons. Without a clear view of your goals, it’s impossible to set your risk tolerance and investment objectives.
You’ll also never know if you are doing things right. You can’t hit a target that isn’t there! You should use your retirement money in ways that further your plan.
Bonus: Work With A Financial Advisor for Your Retirement Plan
It's important to work with an advisor who has specific experience with your needs. Not all advisors are the same or have the same expertise. Regardless of the type of advisor you need, we recommend working with a fee-only fiduciary that has demonstrated experience working with people just like you. Financial planning can give you confidence and security in your golden years.
At Covenant Wealth Advisors, we're passionate about retirement planning. Our team has particular expertise to help clients who are 50+ and transitioning into retirement reduce their taxes and ensure that they retire without stressing about their money.
If that describes you, we would be happy to talk and see if we can work together to create a tax-efficient and worry-free retirement for you.
About Mark Fonville, CFP®
Mark is the President of Covenant Wealth Advisors and a Certified Financial Planner™ professional specializing in retirement income planning, tax planning, and investment management.
He has been featured in the New York Times, Barron's, Kiplinger Magazine, and the Chicago Tribune. Learn more
Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.
The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.