Challenges Of Rental Real Estate:
- Expenses related to maintenance, natural disasters, and tenants who dont take care of your property
- The amount of loss you can deduct may be limited by the IRS passive activity loss rules and the at-risk rules
- Having to address all property issues
- Need for a solid understanding of the local real estate market
- Not typically a liquid asset class
Putting It All Together
Investing doesn’t end with retirement. While almost all retirees face the same challenge of mitigating market and longevity risk, every retirement is different. The investment options laid out in this article can all be a part of a solid retirement investment plan, but the ways and extent to which they’re used will vary from person to person.
“Do not break the boundaries of your risk profile to chase excessive yield though,” Cast says. “Focus on investments that combine to produce the income you need, not necessarily the income you want.”
Start Early And Know Your Options
Kirsten Rohrs Schmitt is an accomplished professional editor, writer, proofreader, and fact-checker. She has expertise in finance, investing, real estate, and world history. Throughout her career, she has written and edited content for numerous consumer magazines and websites, crafted resumes and social media content for business owners, and created collateral for academia and nonprofits. Kirsten is also the founder and director of Your Best Edit find her on LinkedIn and Facebook.
When planning for retirement, one usually identifies financial goals and then decides on the best ways to save and invest to achieve them.
A lot of retirement investing advice involves very specific formulas and strategies. Sometimes, though, it’s helpful for your investment decision-making to take a step back and look at the big picture.
Here are six basic tips to make your retirement investing a little easier and potentially more effective at getting you where you hope to be when you retire.
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Investing Your Pension Income
The other way you might invest in retirement is the standard approach: using some of your spare income to buy assets that you hope will generate a return. How you do this will be much the same as investing at any time of life but with the added caveat that your disposable income may be lower, so you may not be able to take as much risk.
When you access your pension you have the option of taking 25% of the pot as a tax-free lump sum. Most people do this, since there is no real disadvantage to doing so . If you dont want to spend it right away, then investing it may be a very sensible option.
Investment may also be an option if you take most of your pension income via an annuity rather than drawdown. Why not drawdown income? Well, there is nothing to prevent you investing drawdown income in other assets of your choice. But broadly speaking you are less likely to gain much advantage this way. With drawdown, its best to take out only as much income as you need to spend, because it will be taxed. So if you take out extra income to invest, youll pay additional tax, which will offset any investment gains you might make.
With an annuity, on the other hand, you receive a regular, fixed amount. This too will be taxed, but if you do happen to have more money than you need to spend, it may be worth investing some of it if the idea appeals to you.
Read on to find out more about actively investing your retirement income.
How To Find The Right Retirement Portfolio Allocation To Narrower Inflation Hedges
There are a couple of big issues with these types of inflation hedges, which is one reason it’s wise not to go overboard with them. One is that, unlike TIPS, they don’t reflect the broad basket of goods and services that consumers spend money on. Even the broadest-based commodities-tracking funds obviously won’t reflect changes in service categories like healthcare delivery, hair salons, cable TV subscriptions, or gym memberships. REITs reflect inflationary changes in a smaller part of the economy still. Thus, there’s a risk that they won’t defend against the type of inflation you’re experiencing.
Perhaps more important, these investments are quite volatile: If you happen to buy in at the wrong time, as many investors did by racing into commodities following their runup in the mid-2000s, that reduces the inflation-protective benefit that you might derive from them. Of course, the fundamental case for commodities looks better today than it did back then, but commodities have already experienced a significant runup over the past year.
I think it’s reasonable for retirees to forgo commodities altogether.
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Get Help When You Need It
I don’t know anything about investing is a common excuse for postponing retirement planning. Like ignorantia juris non excusat , a lack of investing prowess is not a convincing excuse for failing to save and invest for retirement.
There are plenty of ways to get a basic, intermediate, or even an advanced education in investing and retirement planning that fits every budget. Even a little time spent learning goes a long way, whether through your own research or with the help of a qualified financial professional.
Genius Things Retirees Should Do With Their Money Right Now
Learn how best to spend and save your money in retirement. Plan Your Retirement
Retiring isnt the end of your financial journey. Though you might be done planning for your golden years, youll still have to understand how to save and spend money in retirement. This isnt always easy, as youre likely living on a fixed income.
So, it can be frustrating that there is no standard playbook dictating where retirees should put their money. However, a lack of one-size-fits-all advice is actually a positive. It gives you the freedom to choose from a variety of spending and saving options, shaping your retirement into exactly what you want it to be.
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Vanguard Utilities Index Admiral Shares
This fund focuses on stocks in the utility sector, which tend to have high dividends. It mostly holds large-cap stocks of U.S. utility companies, such as Duke Energy Corporation and Southern Company .
The expense ratio for VUIAX is a low 0.10%. However, it is only offered in Vanguard’s “Admiral” share class, which has a minimum initial purchase of $100,000.
The Best Investments For Income In Retirement
You’ve worked hard for your money. Now it’s time to enjoy it.
Finding the best investments for income in retirement will be paramount to your success.
Even with a investment review cheat sheet, making your money last won’t be easy.
According to the most recent longevity data from the Social Security Administration, a 50-year-old male can expect to live another 30 years, while a 50-year-old female can expect to live for 33 more years.
At age 60, men and women can expect to live another 22 and 25 years, respectively. These statistics highlight the jarring reality that retirees will most likely need to sustain income for decades.
Reaching retirement is a significant milestone and also a time of powerful financial and investment changes. One of those changes is converting your growth portfolio into an income portfolio.
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Withdraw From Your Portfolio In A Tax
When the time comes to cash in your investments which you might do at regular intervals, or the end of your investment term then you will need to take tax into account. Growth on investments is subject to capital gains tax , so you may sometimes have to act carefully to avoid losing more than necessary. Everyone has a CGT allowance so if the growth on the investments that you cash in is lower than this, there will be no tax to pay.
Its also worth noting that CGT is lower than income tax, so in some cases it may be more tax efficient to take money from investments rather than your drawdown fund, if you are in a position to do so. For example, if you invested your original tax-free lump sum at the start of your retirement, then set up a drawdown scheme, you could save tax by taking less from the drawdown scheme and taking the rest from your investment. Any CGT you had to pay would be only 10% or 20% , compared to 20% or 40% income tax on the drawdown money.
There are many ways in which investment can make your money go further in retirement. Talk to your IFA about which options suit you best.
If you found this article interesting, you might also find our article on pension vs property investments informative, too.
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Risk Of Running Out Of Income
The longer you live and the more you take out of your pot, the harder it will be to make your pension pot last as long as you need it to. To try to avoid this happening, you need to manage your pension pot carefully. This includes thinking about how much to take out and how often, and how to invest your pension pot.
The Social Security Cola In 2023 Will Be The Largest Cola Since 1982
The Social Security Administration calculates COLAs based on how the Consumer Price Index for Urban Wage Earners and Clerical Workers changes in the third quarter of each year. For example, the CPI-W increased 8.7% in the third quarter of 2022, so Social Security benefits will get an 8.7% COLA in 2023.
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The Federal Thrift Savings Plan
A federal thrift savings plan is a lot like some of the earlier mentioned retirement investments. Often compared to 401 plans or IRAs, a TSP is a long-term, generally lower-risk investment type. These plans are available to federal workers and service members. When setting up the account, users will pick between five low-cost options ranging from bonds to stocks. There is also an option to select a target retirement date, which can help further guide investment decisions.
Federal workers are also eligible for an employer contribution match that roughly falls around 5 percent. Whenever there is a match involved, retirement accounts get that much more attractive. Always remember to ask your employer about the specifics and keep an eye on your account to ensure its meeting your goals for the future.
Failing To Diversify Your Portfolio
Its not just your risk tolerance that determines what your money should be invested in. You also want to make sure you arent putting all your eggs in one basket, especially as you get older and have less time to recover from big losses if something goes wrong.
To reduce your risk and maximize the chances of having the money necessary to see you through the rest of retirement, invest in different companies across different industries and in different asset classes. Dont ever bet too big on any one type of investment to perform well.
If you arent sure how to build a diversified portfolio on your own, consider investing in exchange-traded funds , including an S& P 500 fund, as well as funds that provide exposure to emerging markets, real estate, and bonds. ETFs are easy to invest in and can offer effortless diversification, especially since an S& P 500 fund will spread your money around to a mix of 500 large companies across a wide variety of U.S. industries.
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Here Are Some Things You Should Factor Into Your Calculations:
Housing costs, including rent or a mortgage, heating, water and maintenance
Health-care costs
Day-to-day living, such as food, clothing, transportation
Entertainment, including restaurants, movies, plays
Travel, including flights, hotels, gas if driving
Possible life insurance
What’s the magic number to hit for a golden retirement?
Over the years, finance experts have said that people need to save $1 million that’s recently climbed to $2 million as the cost of living and age demographics have changed. Some advise that you need to save 80% to 90% of your annual pre-retirement income, or that you need to save 12 times your pre-retirement salary. Those numbers and formulas can be a guide, but they’re not gospel everyone’s situation will be different.
Add Net Worth To Your Retirement Goals
Its been said that you cant reach a goal you never set, and this holds true for retirement planning. If you don’t establish specific goals, its hard to find the incentive to save, invest, and put in the time and effort to ensure that you’re making the best decisions. Specific and written goals can provide the motivation you need. Here are some examples of written retirement goals.
- I want to retire when Im 65.
- I want to travel internationally for 12 weeks each year.
- I want a $1 million nest egg to fund the retirement I envision.
Regular net worth check-ups are an effective way to track your progress as you work toward these goals.
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What Seniors Should Look For When Investing
When determining the safest ways to invest, you should consider the following:
- FDIC-insured accounts: Get peace of mind knowing that your deposits are federally protected. The insurance amount is currently $250,000 for certain investment options.
- Low-risk, low-return investing: If youre not a risk-taker, thats okay. Safe investment options may offer low risk and low returns, but its helpful if youre looking for a way to generate passive income long-term without rolling the dice.
- Diversification: For low risk, focus on the future of your long-term investments. Consider diversifying your investment portfolio with multiple safe investment options like high-yield savings accounts and bonds instead of relying on Social Security or retirement savings. Its always better to have more options when it comes to retirement income.
- Safe investing apps and resources: Educate yourself by downloading safe investing apps and resources or speaking with a financial advisor.
Did You Know: Diversify your investment portfolio. If youre not into stocks, low-risk investments such as high-yield savings accounts and CDs can be great alternatives.
Contribute To A Roth Ira
One clever option for saving in retirement is to contribute to a Roth IRA. The traditional downside of a Roth IRA is that you dont get a tax deduction on your contributions. However, as a retiree, youre likely in a lower tax bracket than when you were working thus, getting a tax deduction on your contributions is not as important. Plus, with a Roth IRA, there is no age limit on contributions, unlike with a traditional IRA.
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our investing reporters and editors focus on the points consumers care about most how to get started, the best brokers, types of investment accounts, how to choose investments and more so you can feel confident when investing your money.
Investing disclosure:
The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal.
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Understand Your Risk Appetite For Retirement Investments
Typically, an investment portfolio is made up of different types of investments, including equities, bonds, commodities or unit trusts. These are known as asset classes. Each can be rewarding, but you have to be willing to accept the investment risks and know your limits.
A financial adviser will help you to work out your risk appetite . This may not be as you expect: you might be much more able to withstand risk than you think.
Remember too that there are also risks involved in not investing such as cash losing value over time due to inflation. Always factor these in when weighing up your options. Keeping large sums in a low-interest cash account isnt always as safe an option as it looks.
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