You've heard the drill before: Spend your career saving for retirement so you'll be able to cover all of your expenses after you stop getting a paycheck. Most financial planners assume that you'll want to draw from your savings after you retire, and the investment recommendations they make are generally geared toward pulling income and principal out of your accounts as needed, with the goal of ensuring that you never run out of money.
That's a reasonable goal, but there's one way in which it doesn't match up with the reality of the situation: For a variety of reasons, most people don't intend to spend down their assets even after they retire. If that's what you want to do, then it could mean that your investment strategy isn't as well-suited to your goals as alternatives would be.
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The shocking reality of retiree money management
The vast majority of retirees don't want to spend down their retirement assets, according to the newly released 2018 Retirement Confidence Survey from the Employee Benefit Research Institute. When retirees were asked what their goals were for what they wanted to do with their retirement savings after they quit work, 25% said that their goal is actually to increase their wealth. In other words, not only do they want to make sure that their portfolios generate enough income and gains to cover their expenses, but they also want to see extra growth that boosts their account balances.
Another 41% said that their goal was to maintain their current asset level, while just 11% said they spent down their assets, as needed. The remainder either didn't have any retirement assets or weren't sure.
That might sound overly optimistic, but surprisingly as it turns out, most retirees indeed have had their asset levels move in the ways they expected. Nearly 2 out of 5 surveyed said that their asset values are actually higher than they expected them to be compared to less than a quarter saying that they were lower. Almost 40% got their expectations just right.
Why people want their assets to go up
It's natural for those who've saved all their lives to want to keep seeing their savings grow. After all, with the cost of living going up gradually each year, your portfolio balance actually needs to rise in order to maintain a steady purchasing power for your savings.
Yet beyond that, there are several good reasons why retirees get value from further investment growth:
- With large, unpredictable expenses like long-term care always a possible need, having more assets makes it easier to cover those costs if they arise.
- Leaving money as a bequest for family members and other heirs also is a wish for many retirees.
- Larger portfolios can generate more income, allowing greater spending without eating into principal. Conversely, shrinking portfolios result in less income, and that can accelerate the decline in the value of your retirement assets.
- Taking money out of traditional IRAs and 401(k)s can have immediate tax consequences, as can having to sell off investment assets in taxable accounts to fund spending needs.
The better way to invest
The disconnect between how retirees want their portfolios to behave and how they invest comes from this unexpected wish for growth. Most investment experts advise relatively low risk levels for retiree portfolios, arguing that their short time horizons make liquidity more important than maximizing returns. There's been a greater awareness of the value of having growth-oriented investments in retiree portfolios to cover longer periods of retirement stemming from greater life expectancies, but that still hasn't had a huge impact on investor behavior.
Yet depending on your specific wishes as a retiree, you need to tailor your investing style to match up with your intent. For example, if you want to leave money for children and grandchildren, they have much longer time horizons than you do, so giving larger allocations to growth investments makes perfect sense.
Sometimes, investing isn't even the right way to handle some financial needs. If long-term care worries are paramount, then it might be more cost-effective to obtain long-term care insurance than to set aside the hundreds of thousands of dollars you'd need to cover such costs on your own. That way, you can pay the premium and then utilize the rest of your retirement savings more effectively, knowing that you have your long-term-care risk under control.
Invest for your goals
The real lesson here is that one-size-fits-all advice can be helpful, but it only goes so far. You really need to look closely at whether your goals match up with the assumptions that most financial advice takes for granted.
If they don't fit together well, change your investment and financial strategy. After a lifetime of saving, the worst thing you could do is make mistakes that leave you without the full benefits of all the work you've done.
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