March 29, 2022

Optimizing Spending And Investing During Retirement

We look at how to optimize spending and investing during retirement

Investing during retirement follows the same “first principle” that investing during your working years does – you want to stay consistently invested, so that your risk-taking can be rewarded over the long term.

The biggest change is that in retirement, your spending – big, small, planned and unplanned – has to come out of your savings and investments. And because you may have a more conservative asset allocation in retirement, you won’t have the same ability to recover losses as you may have with your pre-retirement asset allocation. You also won’t have the luxury of an extended period of time to recover.

Additionally, you want to avoid having to liquidate investments that have dropped in value. A down market can put pressure on your income stream. Generating cash by selling investments that have not recovered their value crystalizes the loss. It’s also important to be sure you have accurately estimated your expenses, so you don’t have to liquidate stocks to cover unexpected expenses.

We take a look at some of the spending and investing rules of thumb you should follow to make sure your retirement funding keeps pace with both markets and your lifestyle.

Set a Realistic Budget

Once your employment days are over, it can be a difficult adjustment to no longer have a replenishing source of income. Taking a careful look at your outflows, from monthly expenses, to splurges, to likely big-ticket items such as home maintenance or replacing an automobile, is critical to setting up a budget that gives you the freedom to enjoy your retirement, without being afraid of running out of money.

Generally, a good benchmark is to take between 3-5% of the total value of your investments in distributions annually. If you can’t completely cover your expenses on that amount of annual withdrawals, you may need to scale back or make other changes.

Increase Your Cash Balance

If you do have an unexpected, larger expense it’s important to make sure you don’t have to liquidate investments.  Shifting your portfolio allocation so you are holding as much as five years’ annual expenses in cash or safe, liquid investments can provide a helpful buffer.

Rebalance Your Portfolio Regularly

You will most likely maintain some of your asset allocation in equities, to continue to provide the possibility of growth during your retirement. In years when the equity market has a strong showing, it can throw off your asset allocation because the value of the equity holdings increases above what you originally allotted. To keep things in balance and avoid unintended risk, you should work with your investment professional to rebalance your portfolio at least annually.

Don’t Get Emotional

The biggest change between your pre- and post-retirement investing self is that you have less time to make up for years in which market returns struggle. However, it is still critical that you remain consistently invested and not try to time the markets. You should determine your risk profile with your investment professional, taking into account not only your income needs and the length of time you’ll need the money to last, but also your own level of comfort with the risk of your investments.

If you develop an asset allocation that reflects all three needs, you should be able to ride out difficult market environments without looking at your dropping portfolio balance and wanting to cut losses. Instead, if you stick to your annual rebalance, you may end up buying more of positions that are at lows, which means you can recover quicker if the market turns around.

It’s All About Balance

With a little planning and strategy, and an ongoing dialogue with your investment professional, spending and investing in retirement can be a happy balance that keeps you engaging in all the things you love to do, and continuing to meet your own personal goals.

Written By
Daniel Mesa
Financial Advisor

Past performance is not a guide to future returns. Investment in securities involves the risk of loss and the advice herein cannot be construed as a guarantee that future performance will be reflective of past returns.

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