Three More Questions Retirees Ask

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Key for RetirementThis summer I started a series on planning for retirement. Many people find retirement planning scary and intimidating. Hopefully you only retire once and you want to get it right the first time. This series answers some of the most common questions we hear.

See the other posts in the series here:

What kind of investments do you recommend for retirees?

Investments should be coordinated with a retiree’s individual need for income, growth of income, safety of principal, and liquidity. In short, a financial plan needs to be created first. An investment strategy can then be developed to incorporate all the retiree’s goals together. Retiree’s often mistakenly believe they need to invest in income producing investments. This often leads them to develop a portfolio which produces little or no growth leaving them vulnerable to inflation. The other problem with a fixed income focus is the temptation to sacrifice quality in an attempt to increase yield. Higher yield = higher risk. The proper investment strategy focuses on total return – growth plus dividends and interest. Total return provides the best chance of producing an income stream which increases year after year to fight inflation. A total return strategy is also more tax efficient as some income will be derived from capital gains. Capital gains have a lower tax rate currently than fixed income.

I’ve heard some people say retirees should not invest in stocks. Are stocks really good retirement investments?

There is a myth going around which says your allocation to stocks should decrease as you get older. I’ve even heard it stated as a formula. Subtract your age from 100 to get the correct allocation to stocks. Using this formula, a 65-year old should only have 35% invested in stocks. This may have worked OK for retirees 50 years ago when they were only expected to live 5-10 years after they retired. However, it doesn’t work for today’s 65-year old couple facing 25-30 years of inflation during retirement.

Most people realize stocks have produced better returns than fixed income over time. The problem with owning stocks is their volatility. Many investors sell their stocks in down markets fearing the market will go even lower. They leave their money on the sidelines while stock prices recover only to buy in again near the top of the cycle. This vicious cycle starts over again when stock prices drop in the next downturn.

Retirees may be better served to embrace the volatility of the stock market. If stock prices were stable, the returns may not be as high. The investing profession calls this a “risk premium.” This simply means that if an investor is to put up with the volatility of his or her portfolio, that investor should be rewarded with a higher return (although there are no guarantees). It makes sense.

Retirees tend to focus almost entirely on the total market value that appears on their monthly statements. Instead, they should focus on the sustained income potential of the portfolio over time. Retired investors are never going to liquidate the entire portfolio on any given day. Those investments are there to provide income. That income needs to increase each year to keep pace with inflation. This is why retirees need stocks in their portfolio. You cannot retire with a 100-percent fixed portfolio and fight inflation.

By embracing volatility, you recognize stocks are going to be consistently mispriced. They will be overvalued during times of euphoria and undervalued when fear grips the public. We believe a successful investor will recognize this truth about the market. He or she will also recognize that no one will ever be able to predict when this is going to happen.

I’ve always liked real estate as an investment. Should I own real estate?

The misconception for a lot of people is that real estate is an investment. Real estate does not grow in value on its own. In fact, you have to continuously put money into it just to maintain its value. We believe the price appreciation experienced with real estate is really only the result of inflation.

Many investors choose to participate in real estate investments called Real Estate Investment Trusts (REITs). REITs offer exposure to real estate investments for growth and income. There are mutual funds which focus on real estate including REITs which offer more liquidity than owning real estate outright. Owning real estate through a fund can be can be an important part of a diversified portfolio.

See the other posts in the series here:

Rick’s Tips:

  • Focusing on fixed income investments to generate retirement income ignores the need for growth to fight inflation.
  • Retirees should focus on the sustained income potential of their portfolio over time and not allow volatility to scare them out of their stock positions.
  • Real estate can be part of a diversified portfolio through the use of real estate mutual funds.

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

Get Personalized Answers
2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437