Retirees who maximize their investments can enjoy retirement at the same time they are growing their nest egg for the future. Regardless of the status of your finances as you approach retirement, or if you've already crossed that threshold, the years leading up to and the first few years of retirement are some of the best times to be financially savvy.
There's a certain amount of frenzy among both families and financial experts concerning how little Americans are saving for retirement. Estimates regarding a potential shortfall in retirement savings vary from a relatively manageable $1 trillion to a more whiplash-inducing $14 trillion; it's not hard to see why the so-called retirement crisis has everyone from average savers to financial pros in a panic.
With the retirement age set to climb to 67 for those born in 1960 or later, and the segment of workers in the 64-75, and 75 and above, age groups returning to the workforce growing faster than any other brackets, all indicators point to Americans extending their working years longer than ever before. Whether by choice or out of necessity, many people who have worked their whole lives to achieve financial freedom may find themselves heading back to work part-time or taking minimum distributions from their retirement accounts in order to make their funds last longer. (For more, see: Will Your Retirement Income Be Enough?)
Here are some ways retirees can maximize their investments and not outlive their savings.
Start With the Basics
Every investment strategy begins with the same basic principle – measuring your expenses against your regular sources of income. Naturally, this is something that should be done on a consistent basis. It is the best way to determine the areas where spending may need to be reduced. This evaluation will also highlight where investments can fill the gap in retirement and, if you have a surplus, will guide your budgeting efforts to establish your future investment plan.
Plan for a Long Life
Longevity is one metric that has become increasingly important in the retirement community. In 1900, the average American life expectancy was only 47 years. Today that expectancy has more than doubled. Many U.S. residents live well into their 80s and 90s. As a result, it's important to ensure that your financial plan encompasses the need for income for a longer life span.
In order to make sure that your funds will cover your expenses for the projected length of your lifespan, set aside a portion of your retirement funds in a low-risk reserve that’s invested in products like money market funds and certificates of deposits (CDs). Once you have saved up a reserve that will cover your basic needs for a period ranging from three months to two years (depending on your risk tolerance), consider adding a diversified portfolio of fixed-income investments to generate a stable income return.
Delay Taking Social Security Benefits
If you postpone your retirement date, you may be able to extend your retirement income. Though there are exceptions, waiting beyond the age you're eligible to retire until your full retirement age (which varies depending on the year of your birth) will mean that your benefit check will be greater. In fact, for each year you can put off applying for Social Security up until the age of 70, your monthly check will increase by 8%, until you finally begin receiving benefits. If it's possible for you to wait, this may well be the best and safest rate of return. (For more, see: Saving for Retirement: The Quest for Success.)
After you have the basics covered, it's important to build a component of flexibility into your retirement planning, because things happen that are impossible to plan for. It could be that you or your spouse becomes ill, or perhaps you unexpectedly have to raise a grandchild. You may even need start-up capital for a product you've come up with.
Whether your unplanned financial event is good or bad, life happens and you may find yourself in the position of needing to add some risk to your investment portfolio in the form of stocks that will accelerate your rate of return. This is okay, and so is temporarily adjusting the rate of withdrawals you're making, as long as you're monitoring the situation and making the needed recalculations once possible.
Enjoy Your Nest Egg in Moderation
If you're in the position of having amassed an attractive base of retirement savings, parting with the funds you've worked so hard to save can cause anxiety. First, recognize that you can't take this wealth with you. Second, if you have a good nest egg, it is certainly time to enjoy the fruits of your labors.
However, failing to invest these funds and outliving your money will assuredly only result in even more stress. As noted above, fixed income –essentially a portfolio of quality bonds that may provide you with a source of income on a monthly basis – may be a good choice in this instance.
Maintain Control to Maximize Investments
Maintaining control is the key to success in maximizing your investments after you retire. At times it can seem overwhelming, but once you are experiencing a long and fulfilling retirement, you will be grateful for the groundwork you too the time to establish.
(For more from this author, see: Take an Active Approach to Fixed-Income Investments.)