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How should you manage your investments now that you’re retired? In summary, put time-tested investment principles into practice and remember that you’re still investing for the long term. After all, depending on how old you are you still may have several decades ahead of you.
Even a mild rate of inflation will increase your cost of living and erode the purchasing power of your money over the years. For example, let’s say you need to initially withdraw $20,000 from your retirement savings to cover your expenses. In 15 years you’ll need to withdraw about $31,000 to keep pace with even a modest 3% average annual increase in inflation. In 25 years you’ll need about $42,000.
Social Security retirement benefits provide annual cost-of-living increases, as do most public employer pension plans. But most private pension plans don’t. So if you have a private pension, your monthly payments will provide a shrinking portion of your retirement income as inflation erodes their value.
According to Ibbotson Associates, as measured by the Consumer Price Index, the average annual rate of inflation since 1926 has been 3%. But that’s only an annual average. That 78-year period included deflation between 1926 and 1933, high inflation during the 1970s that peaked at 13.3% in 1979, moderate inflation averaging about 5% a year in the 1980s, and a relatively low annual average rate of 2.9% in the 1990s.
What’s more, changes in your actual cost of living may differ significantly from changes in the Consumer Price Index. For instance, prices of health care and prescription drugs have been rising faster than the overall inflation rate.
That’s why financial experts generally advise retirees to maintain a well-diversified portfolio that includes both bond and stock investments. Over the long haul, historically stocks have outperformed inflation, bonds, and other investments.
The mix of investments you should target for your portfolio depends on your life expectancy, overall financial situation, and tax bracket. Importantly, it also depends on your financial ability to withstand losses and how much risk you need to take to meet your retirement goals.
An investment professional or tools provided by your financial services firm can help you determine your specific asset allocation plan.
One thing to remember: When deciding how to divvy up your money, view all your retirement investments as part of one pie. For example, if you’re married or part of a couple and you and your spouse or partner each have employer-sponsored retirement plans and IRAs, consider all these accounts as one retirement portfolio.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.
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