Money management used to be a lot easier for risk-adverse retirees.
Back in the 1970s, retirees could put all their money in government bonds, get a 10% plus yield, and be able to sleep well at night.
But those days are long gone.
Today’s economy requires retirees to have a diversified portfolio that will generate an income stream for many years to come since a 30-year retirement is common.
“People are living longer, have medical needs and face inflation,” says Drew Horter, founder and chief investment strategist at Horter Investment Management. “If you go into a guaranteed account like a CD or 10- year Treasury, you’ll actually fall behind the eight ball in terms of purchasing power.”
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How much is enough for retirement?
Wall Street might be in record territory at the moment, but that doesn’t mean retirees are ready to invest their savings in the stock or bond markets. In fact, according to a Fidelity Investments survey, 64% of respondents say they are more interested now in guaranteed-income products, such as annuities, to provide a steady cash flow in retirement than they were before the Great Recession.
Retirees put off by the costs associated with some annuities turn to government bonds as their haven. But experts say these seemingly safe investment strategy means their money won’t grow with the pace of inflation.
“Many risk-averse investors have the perception that U.S. government bonds are quite a safe investment,” says Linda Duessel, a senior equity strategist and portfolio manager for Federated Investors. “U.S. government bond yield is insufficient with inflation.”
Money managers are working retirees that in order to protect themselves from rising inflation in the future, they’ll need to seek out investments with a return that is far greater than what comes with a CD of government bond.
John Sweeney, executive vice president at Fidelity Investments, says retirees’ savings need to continue to grow in their golden years. He recommends they have 55% of their retirement savings in equities, 35% in fixed income and the remainder in cash.
But with the financial crisis still in the rear-view mirror, it can be scary for some to jump back into the market.
To ease into the fears, David Hefty, chief executive of Hefty Wealth Partners and Sweeney advise people to view their money in three buckets. The first bucket is all the cash needed to live for the next two to three years. It should include monthly expenses such as housing and food, but also have enough in it to cover unexpected illness that would require treatment. That money is set aside in a stable--but liquid—investment like a money market account.
The second bucket should cover the costs of living out years four through 10, says Hefty. Ideally, that money would be invested in something diversified such as a mutual fund that has includes bonds and equities. Sweeney adds it’s during the second period that investments should be focused largely on bonds.
The third bucket, which covers years 11 and on should be invested 100% in equities, according to the experts. “You don’t want to swing for the fence,” says Hefty of setting investment goals during this period. “You want a diversified portfolio of equities.”
By adopting a bucket approach to investing, the pair says retirees will feel confident about the next decade of their lives and not outliving their money.
Retirees looking for a guaranteed income stream for their entire life can also turn to annuities. But money managers caution retirees be cognizant of the fees associated with annuities and realize that the value of their portfolio will diminish as the years go on, leaving little to their heirs if they live long.
Duessel recommends diversifying the investments for yield or return. That means retirees either purchasing a mutual fund that invests in different types of bonds, or investing in them on their own.
For instance, the fund could include corporate bonds, high yield bonds, emerging market ones and government bonds. Because the money is diversified between all the different bonds, it will cushion any gyrations in the markets. “We older folks need income, and Social Security is not enough for us so we need our portfolio to work for us,” says Duessel. “The notion of yield diversification reduces the risk.”