How to invest for a secure and successful retirement

If you’re thinking of retiring soon, you’re probably wrestling with a couple of big questions. One is, “Do I have enough money to retire?” But right behind it comes another: “What should I do with the money I’ve saved?” In other words, how should you invest your nest egg so it supports the life you want to live – without running the risk of running out?

In the fourth step in our Seven Steps to a Successful Retirement series, we begin with a paradigm shift. Think about this: Throughout your working life, you’ve focused on making money grow. But in retirement, you need to make your money last. And that requires learning some new rules.

The retirement investing dilemma

Many new retirees these days are being told they have only two choices when it comes to withdrawing from their portfolio to help pay the bills:

• Buy a lifetime annuity that offers steady – but never-increasing – income, or;

• Follow the so-called “four-percent rule,” which involves slowly liquidating your life’s savings – while hoping the money lasts as long as you do.

  
  

But what if there was a better way? One that would allow you to:

• Receive the income you need each year

• Pay yourself annual raises to keep up with inflation

• Preserve – possibly even keep increasing – your principal

We believe there is indeed a better way.

The cornerstone of our investment strategy is to invest not based on market predictions and economic forecasts – but simply on when you will need or want to spend the money. It’s a disciplined, goals-based investment approach, one that we see working every day for many of the investors we work with.

Three keys to smart retirement investing

To make your nest egg last a lifetime – and possibly longer – you’ll want to keep three core principles in mind:

1. You need income that increases over time. Retirement isn’t just about income – it’s about growth of income. Just as Social Security provides cost-of-living adjustments, your investments should generate income that keeps pace with inflation. Investments that pay a fixed income can’t do that, which means your annual cash flows will buy less and less over time.

2. Invest based on time, not timing the market. Each dollar should be invested according to when you plan to spend it – not based on market forecasts, interest rates, or elections. Short-term spending needs should be in cash or money markets. Fixed-income investments, such as bonds, are appropriate for intermediate spending goals. Owning companies that pay rising dividends can help you meet longer-term spending needs.

3. Stick to your plan – especially when things get bumpy.  Markets will go up and down. But if you panic every time things go off course, you’ll derail your long-term goals. Having a roadmap – and the discipline to follow it – is critical.

Building a sustainable retirement portfolio

We use a strategy called goals-based investing and may be worth considering for some retirees. Here’s how it works:

• Year 1 spending needs are funded with cash or equivalents to provide safety and stability.

• Years 2–5 (or even 10) are funded with bonds or similar fixed-income investment vehicles. We use a “laddered-maturity” bond strategy to ensure money comes due each year as they need it.

• Years 6 (or 11) and beyond are invested mostly in high-quality, dividend-paying stocks. To find them, we use a process we developed called The Dividend Method – which focuses on companies with a history of increasing their dividends faster than inflation.

  
  

Over time, these dividends are used to replenish the highest rung of the bond ladder – which helps “escrow” the next five to ten years of planned spending and reduces the possibility that the retiree will ever have to sell stocks in a down market.

You have options

The end goal of investing in retirement is to give yourself choices:

• Live off your income and leave your principal intact if you choose.

• Alternatively, spend down your savings over the rest of your life – but do it strategically.

There’s no single “right” answer. It’s your money, your life, your choice.

But with a smart investment strategy – like the one we developed and use with our clients every day – you can enter retirement with confidence, knowing you’re on a path that’s designed to give you an income that’s predictable, flexible, and secure.

Next up: Protecting your wealth, your health, and your privacy in retirement.

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Opinions expressed in the attached article are those of the author/speaker and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any securities. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.