Here Is How to Safely Invest After Retirement

Young Investor

Strategies for investing gradually change as one gets older. Young adults just starting out in their careers can afford to be aggressive investors, putting 80 percent or more of their savings in stocks, and putting some percentage of stock investments in securities that are considered risky — that offer a chance at outsized gains, at the risk of outsized losses. The theory is, young investors have plenty of time to make up for their losses, and in the meantime can reap the profits from their gains.

Middle Age Investor

Investors who have reached middle age and are beginning to think about retirement should begin to be more careful where they put their money. During the stock market crash of 2007-2008, many investors lost as much as 40 percent of their nest eggs. Although the subsequent bull market allowed those who stayed in the market to recoup most of their losses relatively quickly, other bear markets may not recover so quickly. After the stock market crash of 1929, it took Wall Street twenty years to recover to previous levels. Investors in their 50s may not have that much time. And those investors who were spooked by the 2007-2008 crash and pulled out of the market altogether near the bottom will never recover their losses.

What about retirement, particularly early retirement? If you retire at age 62, you should plan for at least thirty years of active living; your money will need to last that long. Depending on other sources of income you may have (a company pension, for instance, or Social Security), you will need to plan very carefully to ensure that your money lasts for the entire course of your lifetime, and that you’ll have enough in the bank to enjoy your retirement.

It may be tempting to pull all of your investments out of the stock market and purchase an immediate annuity, giving you guaranteed income for life. Or, another option may be to purchase a portfolio of corporate bonds and hold them to maturity. Ten-year bonds are paying on average around 3.5 percent (as of February 2012), which is better than any money market fund and nearly as safe. Indeed, immediate annuities and investment-grade bonds might make up part of any savvy retiree’s portfolio.

But being safe carries risk as well, namely inflation risk. If a 65-year-old man purchases an immediate annuity for $300,000, he will likely earn between $1,600 and $1,900 a month for the rest of his life. And, if combined with other income, that might sound attractive and sufficient. But what will that $1,600 be worth in twenty years, when our retiree is 85 years old and still living independently and actively? How much will that annuity’s purchasing power erode in the meantime? No one knows for sure, but $1,600 won’t be worth nearly as much then as it is now.

Or what about those ten-year investment-grade bonds paying 3.5 percent? Interest rates remain very low (as of February 2012), and in all likelihood, given the cyclical nature of the financial markets, rates will creep up again. In five years, do you want to be stuck holding substantial quantities of bonds paying 3.5 percent, when current rates may be closer to 6 or 7 percent? And if you want to sell those bonds on the secondary market prior to their maturity, you won’t get anywhere near their face value.

Growth, a Hedge Against Inflation

The bottom line is, a retiree aged 62 (or 75 for that matter) needs some chance at growth as a hedge against inflation. And that means keeping some percentage of your portfolio — 40 percent, 50 percent, or more, depending on your risk tolerance — in the stock market. You don’t need to be reckless and chase performance, buying risky stocks at their highs; the bulk of your securities should be blue-chips that pay dividends, giving you income while you have a chance at capital gains as well. If a stock increases in value by 15 or 20 percent, or to some level that you establish beforehand, then sell some and pocket your profits, keeping some shares at the same time in case share values rise further. If you’re not confident about managing your portfolio on your own, then invest in low-cost, no-load mutual funds from a fund company such as T. Rowe Price or Vanguard — purchasing directly from the investment house to avoid excessive fees. These companies and others offer a broad range of mutual funds, including funds that invest primarily in dividend-paying blue-chips.

Just because you’re retired doesn’t mean you can stop thinking about money matters. For most retirees, staying actively invested in the stock markets at least to some degree makes sense.