Investing postretirement can be much more complex than it was during your career. You’re going from the simple (but not easy) plan of “throw all the money you can into your retirement account” and “invest for the long term” to the much more complicated process called “Um . . . I think we’re supposed to live on this nest egg somehow?”
The reason why postretirement investing can seem like an entirely different game is because your goals are now different. During your career, you focused on growing your nest egg through contributions and investment returns. While you may have worried about market volatility, you also knew your portfolio had time to bounce back.
After retirement, however, your aim shifts from growth to protection, which can feel like a more complicated objective. The good news is that even though investing is different postretirement, the average retiree can master the new rules.
Protect your principal and your buying power
There are two specific hazards your money faces in retirement: loss of principal and loss of buying power. If you lose principal, you risk running out of money in retirement. But if your money loses buying power due to inflation, you risk running out of money in retirement.
Unfortunately, the best way to protect your nest egg is to park it somewhere very low risk—where it will lose buying power over time because of inflation.
And of course, the best way to protect your money’s buying power is to invest it in higher-risk/higher-return assets—the assets that are more likely to go for a dive at the wrong time and demolish your principal.
So how exactly are you supposed to solve this catch-22?
Make your portfolio into a time machine
Your portfolio doesn’t have to choose between the future and the present. You can manage the risk of losing principal and the risk of losing buying power with the right investment horizons.
On the one hand, you want to invest like it’s 1999. No, that doesn’t mean buying shares of pets.com. It means investing like you have decades ahead of you–which you do! You can keep a portion of your portfolio invested in higher-risk/higher-return assets for the long term. This is the best way to fight inflation. You don’t need to touch this money for many years, so you have time to ride out the volatility and take advantage of the long-term growth potential.
On the other hand, you need to invest like the next market crash is just around the corner. No, you don’t need to liquidate your investments and bury the cash in your backyard. But you should invest a portion of your money in lower-risk assets that will protect the principal over the next few years while offering some modest growth. This is the best way to ensure that money you need in the relatively near term will maintain its value.
Budget
The other aspect of protecting your principal is regular budgeting. Having a dynamic budget that you revisit on a regular basis will help prevent overspending, which can keep you from dipping into your principal.
If the idea of budgeting makes you break out in hives, not to worry. No one is going to force you to generate spreadsheets or account for every coffee. What’s important about retirement budgeting is understanding your baseline expenses and planning for a retirement income that covers them. From there, you will want to periodically check your spending against your predicted expenses and your income and make adjustments when necessary.
Rebalance
Rebalancing refers to the process of selling off high-performing assets to invest in lower-performing assets. It helps maintain the asset allocation you set up within your portfolio after it has drifted away from your targets.
Regular rebalancing of your portfolio allows you to move high returns you have in more volatile assets to the principal-protection portion of your portfolio, which helps shore up your nest egg. In addition, rebalancing when your volatile assets are going gangbusters lets you increase your retirement income to account for inflation.
Protect your nest egg
Investing doesn’t stop just because you’ve left the 9-to-5 world behind—although the goals have changed. Instead of investing primarily for long growth, which you did as a younger adult, postretirement investing is all about protecting your nest egg from the twin hazards of loss of principal and loss of buying power.
Keeping your portfolio invested for both short- and long-term time horizons allows you to maintain the principal while also giving your money a chance to outpace inflation. Making and revising your budget regularly protects your money from overspending. And regularly rebalancing your portfolio helps protect your principal and gives you a method to increase your retirement income to account for inflation.
If you take care of your money in retirement, it will take care of you.