Those of us saving for retirement face a triple whammy of circumstances related to finding smart investments to help keep us financially secure:
- Americans’ lifespans are increasing.
- Interest rates have risen in recent years, but are still low by historical standards.
- Most retirees can no longer rely on traditional pensions.
This trio of hazards makes retirement-income planning much trickier than it was just 10 or 15 years ago, according to Tracie McMillion, CFA®, Head of Global Asset Allocation for Wells Fargo Investment Institute. As a result, folks now approaching retirement need to consider some different strategies to find smart investments for their portfolios, says McMillion.
Consider this: In the past, most retirees knew exactly how much they would earn from their monthly retirement pensions. For other goals, such as having extra income or avoiding losing money they earmarked for near term goals, finding smart investments was fairly simple: Just look at potentially safe, low-yielding options, such as bonds, money market funds, certificates of deposit (CDs), and cash.
“Unfortunately, these stable, lower-yielding investments won’t necessarily work as well for many of today’s retirees,” says McMillion. Why not? Such conservative options may not allow your money to potentially keep growing throughout your longer lifetime. In fact, some of these choices may not even keep up with inflation.
So what defines smart investments and strategies today? Depending on your age, financial goals, and risk tolerance, you might consider some combination of the following strategies:
- Diversify your portfolio to help reduce risk: Because current interest rates are so low, you probably won’t want to move all of your funds into bonds or similar fixed income assets once you retire. It’s unlikely that you’ll earn enough on your money, notes McMillion. “A more diverse portfolio, which includes bonds, but also some growth assets like stocks, may allow you to keep earning some income on your money, while potentially continuing to grow your assets for future distributions.
- Be strategic about your required minimum distributions (RMDs) and when to take Social Security: Today, it’s more important than ever to carefully plan how you’ll structure your retirement income streams. A thorough withdrawal plan can help you minimize taxes, which is a savvy way to bolster your estate. Your relationship manager and tax advisor can help you review your options.
- Work a bit longer: Many retired professionals enjoy encore careers: starting up new companies, consulting, or working part-time. “Drawing a salary for even an extra year or two can also give you tremendous financial flexibility in retirement,” says McMillion. However, be sure to talk to your relationship manager and tax advisor about the impact of working longer on your RMDs and Social Security income.
- Business owners: Consider ways to liquidate company shares: Your relationship manager, your tax advisor, and estate-planning attorney can suggest ways to transfer wealth out of your company and to your heirs with minimal tax implications. Again, less taxes equals a more generous estate. These strategies often include creating special trusts. And worry not: You won’t lose your controlling interest in your company.
- Carefully assess how much cash to keep on hand: By cash, McMillion means easily accessible assets, such as those in money-market accounts or CDs. Although you don’t want too much of your portfolio in these low-interest accounts, you want to have enough money on reserve to cover both expected expenses, such as summer vacations, and unexpected needs, like car or home repairs. “You also want to be able to draw from your cash reserves if there are significant market shifts,” she says. “You don’t want to be forced to sell investments when share prices are at unfavorable levels. That’s a quick way to erode your portfolio.”
- Consider long-term care insurance in your 60s: A lengthy nursing home stay or years of in-home care can drain even a sizeable retirement portfolio balanced with smart investments. Those costs can also significantly diminish the size of the estate you pass on to your beneficiaries. Talk to your relationship manager about whether buying long-term care insurance would make sense in your situation.
Global Investment Strategy is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.
Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors is not a tax or legal advisor. Please consult your tax advisor to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.
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All investing involves risk including the possible loss of principal.
Diversification does not guarantee profit or protect against loss in declining markets. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.
This information is provided for educational and illustrative purposes only.