How to Invest for a Long Retirement
Increased longevity adds a new wrinkle to retirement income planning since assets may need to stretch for 20 to 30 years.
A common question: How much is enough for retirement? It's something every investor needs to ask, especially if they anticipate living well into their 80s, 90s or beyond.
The typical investor is underprepared to meet the challenges and realities of a longer retirement, says Michelle Merkel, president and founder of Merkel Financial Services in Columbus, Ohio. "Preparing for retirement is not simply about having a certain amount of money set aside in savings; it's about defining your needs."
That's important for managing cash flow effectively in the earlier and later stages of retirement. Meeting the various challenges of planning for an extended retirement begins with asking these questions:
-- What Is a reasonable amount of money for retirement?
-- Does a long retirement require a different investment strategy?
-- How can retirement assets be made to last?
What Is a Reasonable Amount of Money For Retirement?
It's a simple enough question but answering it can be tricky.
"The reality is, the number is different for everyone because everyone has different facts and circumstances," says Bill Bruns, managing director at MAI Capital in Cincinnati.
Investor A, for instance, might be wondering whether they can retire with $2 million and live comfortably, while Investor B might ask: "Can I retire at 60 with $500k saved?"
[See: 7 Retirement Investment Strategies to Avoid.]
When determining a target number, Bruns says investors would do well to consider their desired lifestyle first and their guaranteed sources of retirement income second. Those guaranteed sources of income can include Social Security benefits, pension payments from an employer or annuity payments. Guaranteed income can provide a financial anchor in a long retirement for investors who are concerned about whether their 401(k), individual retirement accounts or taxable investments can go the distance.
Karlee Schultz, senior vice president and advisory manager at U.S. Bank Wealth Management in Cincinnati, says it's important to keep all the variables in mind for retirement income planning.
"Knowing what lifestyle spending looks like for you today, as well as all the things that could change in the future, can help you determine the right number for you," she says. For instance, higher medical costs or increases or decreases in basic living expenses all come into play as well as target retirement age or any plans to continue working full or part time.
Does a Long Retirement Require a Different Investment Strategy?
Shaping a portfolio for a decades-long retirement means finding the right balance between growth and income. Kevin Driscoll, vice president of advisory services at Navy Federal Financial Group in Vienna, Virginia, says proper diversification is the starting point.
"Investors should be building a portfolio that will last 30, 40 or more years," Driscoll says. "Being too conservative for this type of journey may have an adverse effect on success."
[See: 8 Investing Do's and Don'ts During Market Volatility.]
Including a mix of investments, such as dividend-paying stocks, growth stocks and bonds, can result in a portfolio that's well-rounded enough to survive a lengthy retirement. This can serve a dual purpose in providing investors with sufficient assets to draw on while minimizing one of the biggest threats to retirement security.
"When planning for a longer retirement, inflation is one challenge individuals will face," says Steve Azoury, a financial advisor and owner of Azoury Financial in Troy, Michigan. "Inflation will create an increased demand of income for a retiree's life, which means that your assets will have to continue to grow."
This is where having those guaranteed sources of income referred to becomes important.
For example, an investor who anticipates spending many years in retirement may choose to maintain a higher allocation to stocks to fuel portfolio growth. One or more sources of reliable income could allow them to ride out waves of stock market volatility, as well as inflationary changes, over that time frame.
Merkel says investors should avoid putting all of their money into ultra-conservative investments. "Because you could be retired for longer than you were working, there's a need to plan for a longer growth pattern."
Of course, timing matters when making decisions about asset allocation.
"The most important thing to understand is your risk tolerance," says Cory Chapman, managing partner and money coach at EFC Wealth Management in Los Angeles. "Once you're in retirement, you don't have time to recover so utilizing the appropriate risk in your portfolio is the key to success."
Keep in mind, however, that there's a difference between risk tolerance and risk capacity. The former is the amount of risk an investor feels comfortable taking with their investments. Risk capacity is the amount of risk they need to take to achieve their investment goals. Getting those two to align as closely as possible is instrumental when mapping out a longer retirement.
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How Can Retirement Assets Be Made to Last?
Investing to accumulate enough assets to last the duration is only one side of the coin. The other is determining how to best utilize those assets once it's time to begin spending them down.
Bruns says there are several possible solutions, including working a few more years than initially planned or taking a part-time job to provide supplemental income. This can also help investors to delay Social Security, resulting in a higher benefit amount once they're ready to tap into those benefits.
Choosing the optimal withdrawal rate is also important. The 4% rule, for instance, advocates withdrawing 4% of retirement assets each year to avoid running out of money. That might work well for a 20-year retirement span but adding another 10 years to that could be a stretch. Investors should be doing the math well ahead of retiring to find an individual withdrawal rate that's both realistic and sustainable.
"By determining how much you can withdraw each year, you can avoid the potential of over withdrawing and spending too much early on," Driscoll says.
Depending on how far away retirement is, making assets last might require an overhaul of current spending patterns and rethinking tax-advantaged contributions.
"If you're only a few years from retirement but not financially prepared, you should limit all spending and maximize all retirement accounts," Azoury says. That includes taking advantage of catch-up contributions to an employer's plan or IRA, while also maxing out the regular annual contribution limits.
Schultz says the worst mistake an investor who's looking at a 30-plus-year retirement can make is trying to do it all themselves.
"There's no need to go it alone," she says, given the accessibility of both digital and human financial advisors. "You owe it to your future."
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