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Yes, You Still Need To Invest In Retirement, Here's Why

Whether investing in your 401(k) or rolling money into an IRA, the sooner you start investing with a long-term focus, the better off you'll be. 

However, unique challenges come with investing after retirement— you're no longer working and therefore have different objectives, appetite for risk, and time considerations than younger investors in the accumulation phase. 

Providing a reliable perpetual withdrawal rate for your income needs is vital for you. And to do that, you need to keep investing throughout retirement. 

When you reach retirement age, it may be tempting to bring your investments to a halt, but there are some critical reasons why investing in the markets can help you live your ideal retirement lifestyle. 

Today, we’ll review the core benefits of investing in retirement and strategies to do so with intention. 

Why Should You Continue Investing Throughout Retirement?

The best reason to continue investing in retirement is simple: growing your savings.

Since you’ll be drawing from your nest egg, you want to ensure it remains at levels that work for your present needs and future legacy goals. 

But how you invest may look different than before you left your 9-5. 

Because the stock market is largely unpredictable and volatile, you must diversify your portfolio by including bonds and other low-risk assets at this stage of your life. 

You should continue to invest in retirement for several other reasons: 

Hedge Against Inflation

Investing helps fight inflation, a hurdle many retirees are concerned about. When you're retired and no longer earning a paycheck, you're relying on your investments to keep pace with the cost of living. If prices rise faster than your investments grow, your expenses may cause unneeded stress.

Safeguard Against Unforeseen Medical Expenses

You're not immune to medical costs. As you age, your health needs may increase, so it is vital to have a plan in place to cover these costs. Experts recommend allocating 15% of your budget to these potential expenses. Without proper resources, you may be at risk of accumulating medical debt. Building up the proper savings vehicles lets you control those future costs. 

Prepare For The Unknown 

In addition, other expenses can arise in retirement, such as the cost of travel or home repairs. Continuing to invest helps offset these unexpected expenses without relying on Social Security to bail you out. 

It’s also wise to maintain an emergency fund to prepare for a down market, volatility, or other significant expenses that crop up. 

Leave a Legacy

Investing is a fantastic way to grow your wealth, even after you're gone.

You can use your investments to fund your grandchildren's college educations, start a business, or donate to a charity. These are all things that would likely be impossible without an income from investing.

It's also important to note the most valuable investment you can make is in yourself, which means continuing your education, learning new skills, and staying active with friends and family.

How You Can Safely Invest During Retirement

There are many ways to invest during retirement, but it's not a one-size-fits-all solution. You need to consider your personal needs, financial situation, and the amount of risk you're willing to take on. 

The goal is to ensure you have enough money in your portfolio to live comfortably for the rest of your life—which might mean working with multiple investments, including stocks and bonds, cash reserves, real estate holdings, and more.

One strategy is to invest based on various retirement timelines—short-term, mid-term, and long-term. 

  • Short-term investments should be risk averse since you'll use them sooner than other funds in your portfolio. 
  • Mid-term investment assets (five years or less) can offer risk flexibility while ensuring growth. 
  • Long-term assets (more than five years) can take on more risk and be allowed to grow more aggressively.

This strategy is known as the bucket method. Consider each time frame a bucket. One holds your "safe and stable" holdings for near-term spending needs. A second bucket holds investments that are a step up on the expected risk and return spectrum for mid-term spending. The final bucket holds the highest expected return assets (typically stocks), which are also the most volatile for long-term spending needs. As you spend funds in the near-term buckets, periodically reload them with funds from the longer-term buckets.

How Your Retirement Income Is Taxed 

No one likes to talk about taxes (well, we do!), but it is important to understand the tax implications of the investing strategies you employ in your retirement. 

For example, many folks are surprised to learn that Social Security benefits can be taxed. So can withdrawals from your pension, any tax-deferred investments, and tax-deferred annuities—in the year you take the money. The taxes you owe on this income reduce the amount you have left to spend.

Interest earned in taxable brokerage accounts is subject to ordinary taxation. However, other income is taxed at the long-term capital gains rate, which ranges from 0 to 20 percent depending on your tax bracket and includes both capital gains and eligible dividends (when you've held the investment for more than a year). 

One of the main benefits of taxable accounts, though it's not the only one, is the reduced tax rate on most of your earnings. There are no required minimum withdrawals and no penalties for accessing your money before age 59.5. As a result, you have more freedom to choose which investments to use as income and which to hold onto for future needs.

There are various strategies for reducing potential tax liabilities. Capital gains on some assets can offset capital losses on other investments via tax-loss harvesting. Step By Step can explain how to take advantage of tax benefits and deductions and structure your investment strategy around them. 

Taxes are unavoidable in retirement. However, working with professionals like us to put the right strategy in place can help minimize the pain.

Be Prepared To Make Adjustments.

Like life, the markets change, so it’s best to be ready and willing to adjust your plan when needed. The best way to do this is by thinking about situations that could arise in retirement and preparing your response to them. 

If your health goes downhill, you might need to make changes with your investments or even start taking money out of them to pay for medical bills. If you move into a new home or downsize into an apartment, it may make sense to invest more conservatively than if you lived in a house with a big mortgage. 

You should continue investing for income purposes, peace of mind, and potentially leaving something behind when you pass away so others can benefit from your hard work.

You're Not Investing Alone 

Investing during retirement can be intimidating, but it's one of the best ways to ensure a comfortable future for you and your family. 

Retirement is a time to enjoy your hard-earned money, not a time to stress about it, so it's essential to understand the risks involved in investing and strike a balance between safety and earnings potential. 

Book time on our calendar to schedule a conversation to discuss how to get the most return from your retirement portfolio.