Best Retirement Investments For Retirees

Real Estate Investment Trusts

If you like real estate but arent into being a landlord or mortgage holder, consider investing in equity REITs, which buy, sell, and manage commercial properties such as malls and apartment buildings.

REIT shares are purchased directly on securities exchanges or indirectly through mutual funds, which contain a basket of securities. REITs often pay high monthly or quarterly dividends.

Real estate has provided diversification benefits to investors alongside their global stock and bond positions. REITs provide investors access to a diversified bundle of both residential and commercial real estate around the world that is highly liquid, says Mark Hebner, founder and president of Index Fund Advisors, in Irvine, California.

REITs can be volatile, like regular stocks, so its best not to overdo them.

A Rough Guide To Preparing Your Portfolio For Retirement

Im not a Certified Financial Planner or an investment advisor. You should speak with an expert before you rearrange your entire investment portfolio.

That said, I can offer a few broad ideas around strategy for preparing your portfolio for retirement.

As a general rule, move your investments out of emerging markets if youre invested there and into developed economies. If you want to take this rule to its logical extreme, move all your money into U.S. investments, although I actually feel this increases your risk rather than reducing it, given the lack of diversification.

Likewise, shift some of your money out of small-cap stocks and into large cap-stocks. Move away from individual stocks and put your money into index fund ETFs. Take advantage of tax-advantaged retirement accounts such as IRAs and 401s.

You can also start buying more bonds and fewer stock funds, and even selling some stocks in order to buy bonds.

I personally dislike and distrust the low yields on bonds, so I opt for diversified real estate investments as a higher-yield alternative. Granted, I have a higher risk tolerance than most, as one of the many hidden benefits of pursuing financial independence and retiring early . I can continue investing for high returns because I will continue working long after I could technically afford to stop.

Benefits Of Planning Your Retirement Income

What is your plan for using your hard-earned savings to produce a steady flow of income throughout your retirement years? Developing a written income plan can help you retire with confidence by considering questions such as: What do I want to do in retirement? Where do I want to live? Do I have enough to retire when Id like? How do I create a steady income stream to take the place of my paycheck? How can I plan for the unexpected, such as extreme market fluctuations, health care needs, and other financial needs? And, will my money last throughout my retirement years?

Starting the retirement income planning process five to 10 years before you retire allows you time to develop a thoughtful, personalized plan that will help make the most of your hard-earned savings.

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Wild Card : Your Life Span

Your break-even analysis has the most meaning when you’re confident about your estimated life span — which most of us aren’t. If you don’t know whether you’ll live to see 80 or 90, a break-even age of 83 isn’t terribly meaningful.

Worse, you could feel confident about celebrating your 90th birthday, only to face serious health issues in your 70s. A terminal diagnosis is devastating on its own — and knowing you won’t reach your break-even age doesn’t help any.

A Quick Overview Of Tax

Before diving into actual investments, its worth mentioning that how you hold your retirement savings and investments matters nearly as much as what you invest in.

Uncle Sam doesnt want you out on the street in your dotage years. To both incentivize you to save and reduce your tax liability, the federal government offers a range of tax-advantaged accounts to invest your nest egg.

They start with individual retirement accounts or IRAs, which you open and control yourself . If you dont already have one, review our list of the best IRA account brokerages to help you choose.

These investment accounts come in two varieties: traditional IRAs and Roth IRAs.

Traditional IRA contributions are tax-deductible for an immediate tax break. You must pay taxes on withdrawals in retirement, however. Roth IRAs dont come with an initial tax deduction, but they grow and compound tax-free. You pay no taxes on withdrawals from them in retirement.

Unfortunately, the IRS sets a rather low limit on annual contributions to these accounts. In 2021, you can only contribute $6,000 . You can split your retirement contributions between traditional and Roth accounts if you like.

Depending on your income and employer, you may also be able to contribute to an employer-sponsored retirement account, such as a 401, 403, or SIMPLE IRA.

If youre self-employed you can open a , which comes with much higher contribution limits.

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When Should I Start A Retirement Portfolio

• Early in your career as you begin saving for retirement, you may want to accumulate as high a balance as possible. A growth portfolio is a good option for investors with a longer term horizon.
• As you mature in your career, a balanced portfolio can help retain a moderate amount of growth, but with less allocation towards stocks to help protect against market volatility.
• Closer to and in retirement, an income portfolio can provide long-term sustainability with a greater allocation towards bonds.

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Plan To Retire In A Low Tax Bracket With Tax

If you have non-registered investments, the type of investment affects your ability to stay in a low tax bracket.

You can receive income from your non-registered investments as interest, dividends, capital gains, or deferred capital gains, depending on how you invest.

For example, if you want to stay in the lowest tax bracket and receive $30,000 taxable income from your investments, here is how much cash you can receive:

Dividends are grossed-up by 38%. Multiply the dividend by 1.38. That means $22,000 of dividends is $30,000 taxable income.

Interest income is straight-forward $30,000 income is $30,000 taxable income.

Capital gains are only 50% taxed. Multiply by .5. That means $60,000 of capital gains is $30,000 of taxable income.

Ill explain deferred capital gains in strategy #4. Essentially, they are a mix of capital gains and getting your invested money back. The effect on your taxable income can range between 0% and 50%, depending on how much your investments have grown so far.

How The Best Retirement Investments Fit Together

Unfortunately, it’s not enough to simply select the best retirement investments to create income in retirement.

Your investments should be part of an overall asset allocation that matches your risk tolerance, income needs, return objectives, and tax situation.

Your asset allocation is the most important factor when building a portfolio for retirement.

Dont just focus on chasing the investment that provides the most cash flow or the highest yield.

When creating income in retirement, we prefer a total return approach. Total return investing places greater emphasis on diversification than investing strictly for yield.

Income is generated from capital gains, dividends, and interest rather than just dividends or interest alone. The result is a retirement portfolio that has greater potential to make your money last longer in retirement.

We believe that a total return approach is superior to seeking investments that strictly focus on maximum yield. Here is the difference between both approaches:

Ultimately, chasing high yield investments alone can leave you undiversified, expose you to unnecessary and inefficient risks, and increase the taxation on your retirement income.

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Saving For Retirement Is Different For Everyone

There is no one-size-fits-all approach to saving for retirement. Everyone’s needs will be different, and so will their approach to saving, including when they start and how much they can set aside each year. Consulting with a certified financial planner or other retirement expert is really the best way to understand your unique needs.

“Planning ahead and checking in on your efforts” is key to saving enough for the retirement years, Ludwick says.”It’s dangerous when you’re 75 and realize you’re running out of money and you have to move in with a younger sibling or something.”

His advice? “If you want to stay independent, do your homework ahead of time. Think about all those things that could possibly happen. If they don’t happen, you’re lucky and your kids and grandkids can have a nice gift that you leave behind.”

Knowing The Basics Of Investing

Investing can seem intimidating at first. Theres a lot to learn.

Start with the basics. Set aside time to learn about 401s, stocks, mutual funds and asset allocation. Understand the relationship between risk and reward.

Once youre familiar with these concepts, pick the best way to invest your money. Thanks to technology, theres more choices than ever before.

Ways to Invest Your Money

• An employer-sponsored 401 plan

As you get older and earn more money, chip in more. Increase your contribution percentage after each raise.

Always aim to contribute at least as much as your employer match. This can literally double your retirement nest egg.

To sign up for your 401 plan or learn more about what it offers, contact your HR department.

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Calculate What Your Savings Will Cover When You’re Retired

Understanding what you expect retirement to look like will help determine how much you’ll need in order to fund that lifestyle. If you plan to travel the world in luxury, your budget will be a bit different than someone who just wants to birdwatch from the backyard each morning.

In retirement, your savings will cover many of the same expenses that you had prior to retirement. These include, to name a few:

• Food
• Insurance
• Travel

If you don’t plan for any of these categories to change much from pre- to post-retirement, then you should have a good idea of your budget. However, if you have big plans for your retirement years, it’ll be important to determine how much your new standard of living will cost.

Quick tip: More and more seniors are going into retirement with lingering home mortgage expenses. If your home will not be paid off by retirement, be sure to account for this monthly expense in your savings.

Also be sure to account for unexpected expenses that could come up, such as medical care for you and your spouse, or even helping a child or grandchild financially.

Next, consider where you plan to live. You may want to downsize, or you might plan to buy your dream retirement home. Either way, be sure to factor in all those costs.

Note: The average age of retirement has risen steadily in recent years, from 62 to 64 for men and from 60 to 62 for women.

Defer Converting Your Rrsp To Do The 8

You can get up to $10,500/year of Guaranteed Income Supplement tax-free from age 65 to 72, if you have no taxable income other than OAS. You can still receive non-taxable income, such as from your TFSA or investments.

This is a cool strategy if you have enough in your TFSA or non-registered investments to give you income for these 8 years. You could plan for this by cashing in some RRSP before you turn 65 to maximize your TFSA or build up non-registered investments.

You could also get income by withdrawing from a secured credit line on your home during these 8 years.

To qualify, you could delay converting your RRSP to an RRIF until the end of the year you turn 71. You can also delay starting your CPP until age 70.

You could also make a large RRSP contribution before age 65 and defer the deduction until you need it during these 8 years to give you the maximum GIS.

At age 72, you have to start withdrawing from your RRIF, but you will still receive GIS for one more year since it is based on the prior years income. You will likely lose some or all of your GIS after that.

Deferring CPP to age 70 means you get 42% more CPP for the rest of your life. Delaying converting your RRSP gives it an extra 8 years to grow, during which time it could nearly double.

The 8-Year GIS Strategy can mean you have a much more comfortable retirement after age 71.

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What Retirees Should Invest In: Bonds

Though bonds are not going to make you particularly high returns, they are useful for letting your money grow slowly but steadily. At the very least, they are likely to keep up with inflation. That may not have appealed to you when you were younger and building your nest egg, but in retirement it becomes increasingly important to preserve your capital. Taking big risks that could create a large windfall could also result in you losing a lot of money without having the time to earn it back.

One popular bond option for retirees is a bond ladder. This means buying into a series of bonds with staggered maturity dates. This results in the bonds maturing over time, providing a small infusion of cash over consecutive years rather than a big payout all at once.

Mutual funds focused on bonds are also an attractive option for many retirees. Bond mutual funds let you invest in a variety of bonds, often with staggered maturity dates. You can get consistent income and have your bond investments managed by experienced professionals.

The 10 Best Investments For Your Retirement Savings

Perhaps the biggest drive for investors is the idea of achieving financial freedom, especially in retirement. If you have any savings, it would be foolish not to put your money to work so that it grows while you sleep.

If youre late in getting started with saving for retirement, then investing is even more critical. By investing wisely, you have a good chance of making up for lost time. However, youll want to be careful not to jeopardize your money by being too bullish. Investing involves a juggling act between risk and return. Here are the top 10 retirement investing strategies to help you balance between the two:

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Consider Other Sources Of Income While Retired

There are multiple savings vehicles and income streams to consider for retirement. These can affect how much you need to save today, depending on which sources of income are available to you.

Social Security benefits are offered to retirees aged 62 or older , who have earned enough credits throughout their career in order to qualify for the program. This can provide a steady income stream in retirement. For example, someone born in 1970 who earns $60,000 per year can retire at age 67 with $1,999.00 in monthly Social Security benefits. That’s nearly $24,000 per year that your retirement savings will not need to cover.

A pension plan can also provide you with a steady, monthly income stream. If your employer has one, you’ll need to ask if you qualify, how much income this will offer, and what the pension requirements are.

Annuities are another retirement income source to consider. They’re offered by insurance companies and act as a long-term investment vehicle. After purchasing an annuity either with a lump sum or periodic purchase payments you will receive regular payments over the course of your retirement.

There are other plans and investment options available, but these five are the most common among retirees.

Key Plan Benefits To Consider

Virtually all retirement plans offer a tax advantage, whether its available upfront during the savings phase or when youre taking withdrawals. For example, traditional 401 contributions are made with pre-tax dollars, reducing your taxable income. Roth 401 plans, in contrast, are funded with after-tax dollars but withdrawals are tax-free.

Some retirement savings plans also include matching contributions from your employer, such as 401 or 403 plans, while others dont. When trying to decide whether to invest in a 401 at work or an individual retirement account , go with the 401 if you get a company match or do both if you can afford it.

If you were automatically enrolled in your companys 401 plan, check to make sure youre taking full advantage of the company match if one is available.

And consider increasing your annual contribution, since many plans start you off at a paltry deferral level that is not enough to ensure retirement security. Roughly half of 401 plans that offer automatic enrollment, according to Vanguard, use a default savings deferral rate of just 3 percent. Yet T. Rowe Price says you should aim to save at least 15 percent of your income each year.

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