6 Competing Retirement Investing Goals and How to Balance Them

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This story originally appeared on NewRetirement.

Saving for retirement is hard.

When you are still working, creating a retirement investment plan can seem relatively straightforward. The goal is to simply grow the money.

But as you approach retirement and start looking into the details, your investment goals become more layered, and possibly downright complicated.

You still want your money to grow, but you have a whole lot of other factors to consider.

Here is a look at several competing priorities you need to balance for a solid retirement investment plan.

1. Return on investment and inflation

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So, let’s say that as you retire, you want to minimize the risks to your savings. If you have saved up enough money, why not just convert the assets to cash and sit pretty?

There are many reasons, but the most important is inflation.

To retain your buying power, you need your money to earn a rate of return that is at least equal to the rate of inflation.

For example: If you are earning a 3% rate of return on your savings and inflation is at 3%, then your real rate of return is 0%. The purchasing power of your money has remained flat. Even though you earned money, you cannot buy more now than before.

(Note: The average inflation rate from 1983 to 2019 was 2.63%, and the average from 2010 to 2020 is 1.83%.)

2. Short-term withdrawals and long-term growth

Investment growth
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In retirement, you are likely withdrawing from savings and investments to help fund your expenses. So, you probably don’t want that money in risky investments that might lose value just when you need to make a withdrawal.

However, you do need and want your money to earn returns.

That is why many retirees turn to a bucket investment strategy — invest different buckets of money each with more or less risk associated with them.

Keep money you need for short-term spending in low-risk vehicles, and money for long-term growth can be invested for more risk.

3. Making your money last as long as you do

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It is not just a matter of investing your money. You will also be withdrawing funds, and you need your money to last as long as you do — no matter how long that turns out to be.

According to the Social Security Administration: A man who is 65 today can expect to live on average to age 84.2 and a woman now 65 can expect to live on average to age 86.7.

Planning for these longer life expectancies can put a strain on your retirement financial resources, especially your investment accounts, such as IRAs and taxable brokerage accounts. And it can be confusing to know how much you can safely spend.

If you live longer, you can use less of your savings every year. If you don’t expect to live for very long, you can spend a lot more each year.

The amount you can safely withdraw from savings, while ensuring that you won’t run out of savings, will vary depending on your investment returns, inflation, how long you will live and much more.

The NewRetirement planner lets you easily see when you might run out of savings. And every change you make to your financial profile will tell you exactly how you impacted that out-of-savings age.

4. Minimizing taxes

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Taxes can be a major expense during retirement. Withdrawals from traditional IRAs, 401(k) plans and other retirement accounts will be subject to income taxes at your highest marginal rate.

For example, if you have $1 million in a traditional IRA, your actual spendable cash from that account might only be $700,000 or so depending upon your tax bracket.

At age 72, you are required to take distributions from your various retirement accounts (except for a Roth IRA) called required minimum distributions (RMDs). This is an effort by the government to recoup the taxes that you didn’t pay on the contributions to these accounts over your working life.

Add to this taxes on most pensions for those who have them, annuity distributions or monthly payments and potentially a portion of your Social Security, and it’s conceivable that your tax rate may be as high during retirement as when you were working.

One of the biggest decisions that retirees need to make concerning their investments is when to take withdrawals, from which accounts and in what order.

This has implications across a wide range of investment issues, perhaps the biggest being taxes. It can make sense to consider a Roth conversion with some or all of your IRA assets prior to the onset of RMDs, especially if your income has dropped in your 60s.

For those still working who have a pension or other income distribution, planning is vital.

5. Trying to leave an estate

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Some retirees feel that leaving an estate is a priority. Perhaps you want to benefit heirs such as a spouse, children or grandchildren. Or perhaps your intentions are charitable.

Leaving a financial legacy can be a valid investing goal.

Note that an estate can come in many forms, not just cash or investments. Your estate might include real estate such as your home, other property or items of value.

Make sure your estate plans are up to date: Consult Estate Planning: 11 Documents You Need for Coronavirus and Always.

6. Other priorities

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Besides funding retirement, many retirees also want their money to fund children’s or grandchildren’s education or charitable causes.

Using money to reflect your values can help lend meaning to your year’s of saving and investing and to your life in retirement.

These priorities can be balanced, but you should first make sure that your own spending needs (if not wants) are covered first.

How to balance your goals

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Here are a few tips for a solid retirement investment plan that can help you achieve all of your retirement investment goals.

Smart allocation

While retirees need to be mindful of the level of risk they are taking with their investments, they need growth to stay ahead of inflation and to help ensure they don’t outlive their money.

This means an allocation to stocks that balances this need for growth with minimizing downside risk. Regarding risk, retirees just don’t have the time to make up for out-sized losses as would someone in their 30s or 40s.

The days of a portfolio of bonds and CDs only are long gone. Dividend-paying stocks can be a means to produce a consistent stream of income, but investors need to understand that these are still stocks and carry the risks inherent in investing in stocks.

Try a bucket plan

Investors should consider a “bucket approach,” which means having certain portions of their portfolio set aside for cash needs for a set period of time (perhaps one to three3 years’ worth of cash needs), and then buckets for intermediate growth and income as well as one for longer-term growth.

The latter bucket would largely consist of stocks, the middle bucket might consist of a combination of fixed income and income procuring stocks. Everyone’s situation will be a bit different, however.

Explore different types of bucket strategies and use the NewRetirement Planner to help you assess whether or not one would be right for you.

Plan for retirement income, not just investments

“The most important thing you can do for your retirement is have a plan, specifically a retirement income plan. A plan covers far more than what investments to pick. Investments are the last part of the plan; the icing on the cake. They should come only after you have the main meal menu in place, and the cake baked,” says Dana Anspach, founder and CEO of Sensible Money (and one of MarketWatch’s RetireMentors).

Have a retirement investment plan and keep it updated

Investing during retirement is complicated and is a juggling act between achieving enough growth to ensure your money lasts, managing your tax hit and controlling downside risk.

Planning and regular reviews of your portfolio and your overall situation are a must to help ensure financial success in retirement.

A good online retirement planner can also help you set up a good initial retirement investment plan as well as keep tabs on how well you are managing your resources.

Get reassurances from reliable professionals

Many of us struggle to keep up with our investments when the only goal is to grow the money. Because things get so much more complicated in retirement, you may want to seriously consider using a financial adviser.

Years ago talking to a financial planner could be intimidating and confusing. But since the coming of digital technology and communications, getting quality, dependable advice without sales pitches has become easy and inexpensive.

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