What is Smart Retirement Investing?

We’ve all seen the TV ads depicting the former professionals now enjoying retirement as volunteers, beekeepers and potters. The emotional background music swells as these individuals seamlessly transition from working hard to pursuing their passions. But what really needs to happens in between working and enjoying retirement? Peloton explores the 6 Things you Need to Know About Investing for Retirement.

1. Retirement is a life event, not an investment event

People plan for retirement as a calendar event – the start of a new phase of life that’s different that their working life before it. In most cases, whether you fully retire or just scale back, your lifestyle changes dramatically. For your investments, a retirement date should be a non-event. Your portfolio should already be positioned to meet your retirement needs before you officially retire. Portfolio management is a fluid process, and if the person handling your investments is doing his job, your portfolio has been gradually transitioning towards your retirement for years. So when you retire, significant changes are not necessary. With time to plan, why expose your nest egg to potentially negative market conditions at the time when certain adjustments must be made?

2. Portfolio structure is as important as performance

You’ve been saving your whole career. You’ve worked to accumulate and grow your money. In retirement, the game changes. You still need growth but something else becomes even more important. How do you convert those investments back into cash to pay bills? You could sell stock each month and withdraw the cash, but that’s not a strategy. Selling long-term investments to raise cash short-term allows for ongoing market timing mistakes. We focus on portfolio “structure” to ensure that your investments are generating enough cash internally to fund steady, consistent withdrawals. This use of individual stocks and bonds allows us to control and refine each client’s cash flow so we aren’t forced to sell anything at the wrong time.

3. It’s a bad idea to get really conservative

When you retire, your priorities evolve. Whereas growth was the only goal before, now growth and income are both important. Your portfolio should already be geared for this. The standard advice is increase fixed income (bonds) and reduce exposure to equities (stocks). This realignment should have happened approaching retirement, so everything is already in place on Day 1. The problem is that all too often, new retirees take this advice way beyond the reasonable limit by getting way too conservative. How long would your nest egg last if it stopped growing the day you retire? Very few households have enough assets to provide for decades of retired living without any ongoing growth. Yields are so low that the most conservative assets – cash and bonds – return very little. So the only way to achieve the necessary growth over time is to have a portion of your portfolio in stocks. Smart advisors will adjust the risk profile of the portfolio with the types of stocks they use, including more focus on less risky dividend-oriented stocks.

4. Your assets need to last you longer than you think

Most people still think 65 is a reasonable retirement age, and maybe it is. The trouble with your investments is that by today’s life expectancies, one or both spouses is likely to live into their 90’s. In many cases, nest eggs need to last someone 30 years or more. And if leaving money for heirs is a goal, the investment horizon spans generations. This is achievable, but in most cases it requires that your investments keep working, earning, and growing throughout retirement.

5. You don’t need to spend retirement assets right away. (But eventually the IRS will make you withdraw some.)

This is about an integrated approach to managing money, which remains essential throughout retirement. Each of your individual accounts should work together and complement the others. Just because you’re retired doesn’t mean you should start tapping your retirement accounts. Withdrawals from IRAs are taxable income to you, and the IRS wants its cut. If you’re fortunate enough to have accumulated additional assets outside of retirement accounts, it is best to spend that first (because you’ve already paid tax on that money). You can’t hold off the IRS forever though. When you reach age 70 ½ you’re required to withdraw a percentage of your retirement accounts and pay tax on it. It’s known as the required minimum distribution (RMD). It’s a small percentage but adds another retirement complexity that must be coordinated.

6. Being retired probably won’t cost as much as you think

Finally, some good news. We’ve found that clients spend less in retirement than they expected. It could be because little everyday expenses like dry cleaning and gas for commuting – or lunches out everyday – quietly go away. This does not, however, make managing your investment portfolio through retirement any easier. Nor does it decrease the importance of maintaining a prudent level of risk throughout. It’s important to be positioned properly before you retire and to have a plan for managing your investments.

There’s a lot to know. Find out how Peloton can help you get ready for retirement and then enjoy it.