Thu. Nov 30th, 2023

Investing in Retirement – 5 Important Tips to Consider

Diligent investing is ideally something you practice throughout many life stages. As a young adult, investing is critical for wealth building and setting yourself up for financial stability later on. Similarly, as you approach the end of your career, ensuring your investment plan is on track is an important money move.

However, sticking to your investment strategy is important during retirement, even if your plan changes significantly. If you want your nest egg to last, be sure to follow these five key retirement investment tips as you begin a new and exciting life stage.

1. Balance Diversification & Risk

Your investment strategy will most likely change throughout your life. This is largely because your risk tolerance, financial needs, and priorities change as you age.

While younger working professionals might focus on high-growth investments and take on a more aggressive portfolio composition, it’s worth reshaping your retirement investing plan to suit your new life stage.

If your portfolio has previously been stock-heavy, increasing your diversification through low-fee exchange traded funds (ETFs) or mutual funds may be a wise move. You don’t have to forsake stocks altogether, but consider taking a more balanced approach with your investing.

Ultimately, you can afford to take on a more conservative portfolio composition since wealth building is less pressing than wealth preservation and maintaining your health.

2. Know your Numbers (Net Worth & Withdrawal Rate)

Another important aspect of investing in retirement is to understand two numbers: your net worth and your annual rate of withdrawal.

Your nest egg should suit your new lifestyle and allow you to live comfortably during retirement. Therefore, it’s important to have a clear understanding of your total net worth and what your annual expenses are.

Ideally, investment performance lets your portfolio keep up with your annual rate of withdrawal or even surpass it. However, constructing your portfolio to accomplish this task requires knowing your expenses and how much you need to withdraw per year.

A popular rule of thumb for determining your withdrawal rate is the 4% rule. This rule suggests that retirees can safely withdraw 4% of their portfolio per year because dividends and portfolio growth can cover the expense. This rule isn’t unanimously agreed upon, but the point remains: you need to understand your total net worth and annual expenses to forecast how much money you can comfortably withdraw per year.

3. Don’t Ignore Fees

Part of your successful retirement planning might simply involve speaking to a financial planner to stay on track. Alternatively, your retirement investment strategy might significantly change your portfolio.

Whatever the case, it’s important to still keep an eye on fees to ensure your money is working as efficiently as possible. If you switch to a new financial planner or seek financial advice for the first time, research the differences between fee-only and commission-based financial advisors to understand your options. 

Similarly, don’t be afraid to explore options such as low-fee robo advisor platforms like Wealthfront and Betterment. Both robo-advisors charge a 0.25% annual fee for wealth management and offer retirement investing options to help you protect and grow your nest egg.

4. Factor in Lifestyle Changes

It’s not always easy to anticipate how your life changes with retirement. However, you should make an effort to be as realistic as possible when creating your retirement investment plan.

If you anticipate your new lifestyle will make it easier to make your money last in retirement, factor this into your planning. Common examples of changes that make it easier to save include downsizing your home, selling a vehicle, and doing less traveling.

In contrast, if you have grand retirement plans that are expensive, your investing strategy needs to reflect this. Will your money run out if you follow through with everything on your retirement bucket list, or do you have a large enough nest egg to support your plans?

Ultimately, you need to look at the numbers to find the right balance. Retirement should be an enjoyable life stage, but it also requires responsible financial management.

5. Keep Emotions in Check

Another important tip for retirement investing is to keep your emotions separate from your financial plan.

When your nest egg is your main source of income, it can be difficult to watch market volatility or lackluster performance impact your net worth. However, sticking to a plan is important, and you should always seek professional financial advice before making rash decisions.

If you have a diversified portfolio and know your exact spending needs, it’s much harder to be thrown from a bad year of market performance or a dip in your portfolio. Keep emotions separate from your retirement investing strategy, and trust the process.

The Bottom Line

Like any life stage, there isn’t a single formula for successful retirement investing that suits every individual. After all, every household is different, and your retirement strategy truly depends on your goals, net worth, and overall lifestyle.

However, retirement investing still requires diligence and attention even though your overall portfolio and financial outlook might change. Thankfully, if you follow foundational retirement investing tips, you can ensure that your retirement years are ones of comfort and financial security.