Investing in retirement is different than investing during your working years. Since you are counting on your assets for your retirement income, preserving your savings becomes more important than asset growth.
This strategy adjustment can be a challenge for do-it-yourself retirement investors who have invested the same way for decades. Investing in retirement requires a new way of thinking and some changes to your asset allocations. Here are six tips to help protect the nest egg it took decades to save.
Consolidate accounts. Whether you're approaching the end of your career or already retired, consolidating retirement accounts will help simplify your finances. "Now is the time to consolidate assets and declutter," says Michelle Tomei, an investment adviser representative at M3 Investment Services in Royal Oak, Michigan. "Having multiple IRAs, old 401(k)s and numerous investments may make it difficult to stay organized."
Over the course of a career, workers may accumulate multiple accounts from different employer-sponsored plans. Choose an account provider and transfer your assets there to consolidate accounts. While you're at it, consider other financial house cleaning items on your to-do list. "This is also a great opportunity to review account registrations, update beneficiaries and list a trusted contact person," Tomei says.
Plan for a long life. It's possible that you will live another 20 or 30 years in retirement. Therefore, you still have enough time to take on some risk in your portfolio. "While being more conservative is often advisable for retirees and pre-retirees, being too conservative may cost you in the long run because long-term inflation can erode spending power," says Mike Kreft, a financial advisor at Palmetto Coast Wealth Management in Charleston, South Carolina. "Even if you're already retired, it's important to include stocks in your portfolio to help keep up with long-term inflation, or you might subject yourself to longevity risk -- the risk that you could outlive your money." The precise weighting of stocks and bonds in your portfolio should be derived based on your age, investment horizon, income needs and risk tolerance. Evaluate your portfolio allocation on an annual basis to ensure your retirement investment plan stays on track.
Transition to a retirement planning mindset. Workers spend most of their career building assets and optimizing returns. It can be hard to reverse that way of thinking, but retirees need to start protecting what they have saved. "Saving for retirement is fairly simple and relatively easy for DIY investors. Save money, keep your expenses low, diversify your investments and watch them grow," says Dan Murphy, a financial planner and founder of Greater Good Financial in Minneapolis, Minnesota. "However, shifting your mindset from saving to retirement income planning is not simple."
The shift from saving your nest egg to spending it is a difficult adjustment for many people. "If you screw up saving, you end up with less money in the end," Murphy says. "If you screw up your retirement income plan, you could run out of money." Some retirees continue to work in order to help their existing nest egg last longer.
Keep emotions in check. Severe market fluctuations can have a different effect on your psyche in retirement compared to your wealth accumulation years. While you're still building a nest egg, market declines present an opportunity to buy low. However, "when you retire and you're counting on your investments to survive, watching your $1 million portfolio go down by $150,000 is much more difficult to stomach," Murphy says.
When the stock market declines, it's important to remain level-headed. "Don't let emotions get the best of you," Tomei says. "Investors can quickly sabotage their own portfolios when making financial decisions based on fear."
Some retirees consider pulling their nest egg out of the stock market, but that can also be a mistake. "It can be tempting to think the best way to protect your investment portfolio is to move your money out of the market, but that assumes you know when to get out," Kreft says. "It's often better to remain fully invested and consider rebalancing."
Follow the research. Investment decisions are too often driven by sales pitches. "Few DIY investors or financial planners take the time to read the boring research papers on retirement income planning," Murphy says. "As a result, the investments and products that are the most commonly recommended by researchers end up being utilized the least."
Salespeople might push investment or insurance products that aren't the best option for that individual. To avoid financial products that are inappropriate for your personal situation, perform your own extensive research before making a final investment decision. Carefully consider lower-cost alternatives, and always make sure the terms and fees are transparent. If a product doesn't feel right, pause to educate yourself.
Ask for help. Even if you've been a do-it-yourself investor your entire life, there may come a time when you should consult an expert. Financial advice comes in many forms, including robo advisers, hourly fee-only financial planners and comprehensive personalized wealth management. With so many choices, it's possible to find help no matter how much you can afford.
Robo advisers are online brokerages that use algorithms to make financial decisions for your investment portfolio, thus removing emotion from investment strategies. For investors looking for a second opinion or some basic portfolio or retirement planning guidance, meeting with a qualified adviser who charges by the hour can validate or improve your current strategy. If you feel lost, or if your personal health or financial situation changes dramatically, a comprehensive wealth manager can help you navigate the financial situation.
When acquiring financial advice, make sure the included services and fees are clear and transparent. After working with an adviser, evaluate if the paid services were worthwhile and helped you meet your investment objectives.
Craig Stephens is a blogger at Retire Before Dad.
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