How Should I Invest After I Retire?

“How should I invest after I retire?” People ask me this all the time. In fact here’s an email I received not long ago from “RM”:

“When I retire later this year should I keep my 457b funds in a fixed account currently earning 3.5% or move them to Vanguard which I currently have an IRA with in (growth funds)? Of course they have many, many funds to choose from which are very low cost. I will have a defined pension to draw on as well as social security, {full at 66}.”

“RM” is absolutely asking the right question when he inquires about the best investments for retirement income. And he’s given us some good background information. But I’m not sure if we know enough about “RM” and his situation in order to actually provide some guidance.

What We Know or Can Assume

If we assume that our friendly reader doesn’t need to generate income from his retirement investments right away (because of the pension income) we still know that in 6 or 7 years, when he reaches age 70 ½ he must start RMD (required minimum distributions) from the account.

Because “RM” didn’t say anything about particular plans to tap into the plan, we can assume that he wants that money to last as long as possible and to provide the maximum income stream possible.

We also know that “RM” isn’t completely risk averse. He has a portion of his money in a fixed account and I assume that’s by choice. He also has money with Vanguard in growth funds. Proof that he has at least some comfort with market volatility.

We can also assume that “RM” is a healthy person and is interested in having this money last as long as possible. My experience is that when people have a family history of short-term longevity or are ill, they typically include that when they contact me.

These are all items that must be considered when you make retirement investment decisions. Now, if our picture of “RM” is accurate, it’s pretty easy to give his some general guidance. (But without having this information, it’s impossible.) As with most important decisions, the path to the right answer is to make sure you ask the right questions. And if everything I’ve described above is accurate, there is only one question “RM” has to ask;

“What is the best way to invest to create the most retirement income over my lifetime with the least risk?”

Before we answer this, and I promise I will shortly, we have to understand how truly profound this question is. When you ask how to invest over the long-run, you preclude the question of how to minimize short-term volatility. In other words, we can only solve one of two problems. Either we can seek out the best investments for long-term retirement income or we can focus on those investments which provide the least short-term volatility. We can’t have it both ways.

And if our focus is long-term income, “RM” must be willing to accept short-term volatility. OK, with that out of the way, let’s get down to the real “nitty gritty”.

“RM’s” investment strategy should include some growth. Study after study shows that the best way to plan your retirement is to invest in a way that will combat inflation. That means you must have equity growth as part of the portfolio. “RM’s” thought of using the fixed account will maximize his short-term needs for security but it will jeopardize his long-term needs for secure income.

That’s because his spending will rise with inflation overtime but his income will stay the same. That’s a recipe for disaster and the only way to counter the damaging impact of inflation is growth.

Whether or not Vanguard is the best choice for “RM” I don’t know. Cost is important of course but that’s far from the most important consideration when making investment decisions. “RM” has to first determine how he wants to manage the money. That will be a function of style and risk tolerance.

For my money, I like to invest using a market sensitive approach but it’s certainly not for everyone and it’s certain no guarantee of future results.

How are you going to increase your retirement income? That decision will determine what kind of funds to use and where to buy them.