Investing. Tough by itself. Retirement. That's also tough by itself. What happens if you put the two together? How do you invest during retirement? What factors are at play?
You’ll learn about that and more in the article below.
What sources of income do you have?
Your investment strategy during retirement as a lot to do with how much income you will need. How much income you need, depends on how high your current expenses are. If you are carrying debt into retirement, do your best to get it paid off before you get there.
There are several debt repayment strategies listed in this article, here.
- Social Security
- Pension (if you’re lucky)
- Retirement Savings
Sometimes there are others outside of those three. Part-time work and rental income are the most common. Working part-time, might not be a bad idea if a) you have free time you need to be filled, or b) you have debt you need to be paid off.
Do you need income from your retirement savings?
Almost every retired person, or individual near retirement, will need to use their retirement savings to fund their golden years.
Not long ago, you could get by with a pension and Social Security. Back then people stayed with one company for their entire career and were rewarded for it.
Nowadays, with people changing jobs much more frequently and with the rise in the 401k, fewer employers are offering pensions. Leaving employees to fend for themselves.
If you don’t really need the income, the most proven way to invest your retirement savings is to diversify among three different funds or ETFs.
- Domestic (U.S.) stock
- International stock
- Total bond
You diversify using your personal risk tolerance and time horizon. I wouldn’t go any more aggressive than a 60/40 stock/bond mix. But please, allocate your assets in whichever way makes you the most confident and comfortable.
Otherwise, if you need income from your retirement account, you could take a different approach.
Bond laddering- You take a sum of money and split it up among several different bonds with maturities that get incrementally longer. The bond works like this. You invest some money, say $5,000. During the life of that bond, you’ll receive interest payments twice per year. When the bond matures, you’ll receive back the principal (what you invested). So if you have a large expense a few years away, or you’re looking to make some money until you decide what you’d like to do with it, a bond ladder strategy isn’t a bad idea.
Dividend income - When you invest in a stock, and usually it’s one that’s been around for a while, it’ll pay a dividend. A dividend is a percentage of a company’s earnings used to pay back its shareholders. Some companies pay more than others, but it could be a nice way to supplement your income. Be advised, investing in a dividend paying stock, is still investing in a stock, so invest and diversify accordingly.
How each of your accounts/sources of income is taxed is an important thing to keep in mind.
- Most pensions are taxed at your regular tax bracket. But some military and disability pensions could be exempt from paying those taxes, so check to make sure.
- Social security benefits aren’t taxed unless you start receiving those benefits before your full retirement age AND you receive income from other sources above a certain dollar amount.
- Traditional retirement accounts - Money contributed pre-tax or tax-deductible will be taxed as ordinary income upon withdrawal. Same goes for dividends and interest paid from the account to you.
- Roth retirement accounts - These accounts were contributed to with post-tax money, so the money withdrawn from the account in retirement isn’t taxed.
- Taxable accounts - You are taxed on any dividends or interest received and any capital gains made throughout the year.
Please consult with your respective tax advisor about your specific situation.
One last thing I wanted to mention. A common fear among people near retirement is, “What happens if I retire just before a recession? Well, Ben Carlson wrote a terrific article explaining just that. And he includes several scenarios and how each of them worked out.