Workers who have many years until they need to tap their retirement accounts can and should be aggressive when it comes to building wealth through the ownership of individual stocks, individual stock mutual funds and real estate.
Retirees, though, need to reverse the trend toward risk and focus on maintaining income while at the same time balancing growth opportunities. A retired individual should not place his future income at too much risk.
How Much Risk to Take
Before considering individual investment options, retirees need to look long and hard at the amount of risk they desire. A retiree whose basic monthly expenses are taken care of through Social Security, pensions and guaranteed annuities could, if desired, place more of his investments in stocks to build a buffer for future inflation and to leave a legacy to children or charity.
Retirees who depend mostly on their savings both in and out of tax-deferred plans, such as a 401(k), should take less risk or face the real and dire prospect of being 65, 70 or 75 and having to seek employment to meet their expenses. If a pre-retiree believes she needs to take additional risk in the stock market to keep up with retirement expenses, it would serve her well to continue to work for several more years and build up savings and/or a pension to be able to retire without taking the chance of ending up on poverty.
What Investments to Consider
Keeping risk in mind, early retirees who can meet most or all their expenses through Social Security and pensions can consider investing their portfolio 50/50 between stocks and bonds, preferably through low-cost, no-load mutual funds. Excellent choices include splitting money between a total stock market index fund and a total bond fund, both available through the Vanguard and Fidelity mutual fund companies, which are reputable investment firms. As the retiree ages, the percentage of investments in bonds should rise until the portfolio holds 30 percent in stocks and 70 percent in bonds. Stocks will help offset future inflation, and bonds will provide income the retiree needs to live on.
Retirees who need to generate additional income to meet their monthly expenses may be tempted to invest more into stocks hoping for fast profits but that would be a mistake. Instead, retirees who need some additional income to make up the expense gap between Social Security and pension income should consider purchasing a single premium immediate annuity. This annuity will provide a guaranteed monthly income for either a certain number of years or a person's lifetime without any stock market risk. The drawback is that once the money is turned over to the SPIA, the retiree, in most cases, cannot stop the annuity and get his principal back. This trade-off needs to be considered before the SPIA purchase is made.
