The retirement savings of most Americans suffered a critical blow as the result of the Great Recession. Prior to the collapse of the housing market, most middle class families built wealth by taking advantage of appreciating home values adding to the equity in their homes, recently they saw their nest egg shrink dramatically. Many people who lost their jobs had difficulty finding new employment opportunities, which meant they had to dip into their retirement savings. Even those people who kept their job realized dismal rates of return on their savings because of low interest rates and reluctance to invest in stocks due to market volatility. According the a survey conducted by the Employee Benefits Research Institute discussed in the Wall Street Journal (see Workers Saving Way To Little To Retire), 57 percent of Americans have less than $25,000 in retirement savings, which is a significant increase from 49 percent when the same question was asked in 2008. This leaves the majority of Americans with two choices…work longer or make smart investments during their retirement years.
Tips for Making Smart Investments during Retirement
Your retirement investment strategy does not have to stop working just because you do. Here are some smart investment tips so your money can work for you as you enjoy your golden years.
- Preserve as much as Principle as Possible: Traditionally, financial advisors recommended that retirees limited their annual withdrawals to 4 percent of their retirement savings. In today’s low interest rate environment, along with the fact that people tend to live longer now than they did in the past, experts recommend limiting annual withdrawals to 2.5 to 3 percent of principle. Another way to preserve your savings is to invest in high quality stocks that offer dividends or to make smart investments in annuities.
- Adjust the Allocation of Your Savings as You Age: A smart investment mix for people who retire at age 65 is 40 to 60 percent in a highly diversified stock portfolio and the remaining portion of the savings in short-term high yielding bonds, cash, and annuities. As you age, you need to shift the allocation of your portfolio gradually until it is 10 to 15 percent in stocks if you are using a conservative investment strategy or up to 30 percent stocks if you have a high level of risk tolerance. Target date funds offer the convenience of automatically shifting the mix of your investments according to a predetermined timetable, which is referred to as a gliding path. Stocks provide the advantage of offering a means to offset inflation.
- Make Smart Investments in Annuities: While annuities are smart investments since they offer a guaranteed income stream for life, you need to use them strategically since they do not adjust with the rate of inflation. One option is to use laddering, which involves purchasing small annuities at set intervals, which takes advantage of the fact that the payouts from annuities increase as you age. Another option is to purchase deferred income annuities, which also help offset the effects of inflation.
By making smart investments during your retirement years, you can make you money work for you so you can enjoy your golden years.
The investment writer , Mike Hayes, has always given several helpful strategies in proliferating income and investment. Check out more interesting articles at Nick Scali Limited . Mike also likes great literature and basketball.