Once you have retired and have more time on your hands in theory, your risk-profile and strategy will almost certainly adjust in order to look at ways of making your money work as hard as possible, but with a view to generating income to boost your retirement income.
The fundamental point about investing after retirement is that you are speculating to accumulate with a pot of money that represents the main body of your financial wealth. It is a sum of money that you have worked hard to grow, and now that you reached a point where your income is going to be limited in comparison to when you were working and earning regularly, you can’t afford to take too many risks with your capital.
So just what are the basic principles that you need to try and adhere to for investing after retirement?
#1 – Review your portfolio
The message to keep in mind is that it is going to be extremely difficult to earn back your nest egg without the support of a steady monthly salary.
Your primary goal is to invest as wisely as you possibly can.While you are still in work and investment markets suffer a downturn, causing the value of your holdings to drop, you have a number of options open to you, such as working longer and postponing your retirement until the situation recovers.
When you have made the leap into retirement and quit your job, you no longer have that option available, unless you try to get back into regular employment.
As you probably don’t fancy the idea of going back to work as a viable option, the sensible approach at your retirement would be to conduct a review of your existing portfolio as your first priority.
You will want to take a look at how balanced your investments are and whether you are exposed to more risk than you are comfortable with in certain areas.
#2 – Work out how much you need
You will need to work out how much money you need each month and calculate an annual total income that you require in order to be able to pay all of your bills and have enough money to live on and do what you want to do in your retirement.
As a guide, if you were able to limit your drawdown to no more than 4% of the total amount of money you have available in your retirement pot and then draw a similar sum each year thereafter, with an adjustment by the rate of inflation, you should be able to live off your savings at this rate for about 30 years without depleting your savings.
Conduct a review of all of your investments and decide how much you can afford to withdraw each year and whether this balances with your needs. You should also take a look to see if your current investments provide a balance in relation to growth, safety of your capital and income generation, that you are comfortable with.
#3 – Plan for the future – even in retirement
An elementary mistake that a lot of retirees tend to make is to view their portfolio with an element of finality and this makes them too risk-averse and unwilling to look beyond their current financial position.
Many of us are living longer than ever before and although none of us know exactly how long we have, the truth of the matter is that many retirees can actually devote more of their savings to growing their money through alternative investment and stock market strategies than they think they should at first glance.
If you retire at about the standard age of 65 years, the majority of financial experts are of the opinion that you can safely afford to allocate half of your assets in sensible alternative investments and stocks and the rest in a mixture of bonds and cash.
This is a much higher figure than many of us would probably be comfortable with initially, but when you look at the potential difference it could make to your retirement income, it is an investment principle that is certainly worthy of your consideration.
You can also then adjust the percentages as you get older, so for example, you should probably consider adjusting the ratio to something like around 37% of your assets in stocks and alternative investments five years into retirement, and so on.
#4 – Understand your investments
There are now many more ways to invest your money than ever before and you are no longer limited to stocks, bonds and mutual funds.
Not all of these investments will be suitable for your risk profile or circumstances, but if you work on the basis that risk can arise from not knowing what you are doing or investing in, make sure you understand all of the investments you have and know what the risks and rewards are.
#5 – Diversify your investment mix
Work on the basic calculation that you have somewhere between 15 and 30 years of living expenses in retirement that needs to be generated from your investments.
Adopting this mindset should encourage you to diversify your investment mix and combat the effects of inflation as well as addressing the possibility that you could potentially outlive your money if you don’t consider some riskier strategies, within reason.
#6 – Generate income
You are going to need income as a retiree of course, as you don’t have a month salary to rely on to cover your living expenses.
Alternative investments offer you a viable option of generating an income without relying on the traditional investment classes such as stocks and bonds. As with stocks, there are a variety of different alternative investments which have varying levels of risk attached to them.
You probably don’t want to expose yourself to volatile investments but there are a number of perfectly plausible alternative investments that could prove worthy of inclusion in your portfolio and generate a decent income, without putting your capital at great risk.
A good example of this would be investing in infrastructure and property funds which provide you with exposure to real assets while also generating a worthwhile income at the same time.
#7 – Keep some emergency funds
It is a good idea to try and set aside up to two years of living expenses in cash. Having some money that you can get hold of easily in an emergency situation will protect you from the need to sell some of your riskier investments at a loss and cover you for a period of time if you are falling slightly short of your income generation target.
Follow these seven investment principles after retirement and you should hopefully be able to enjoy some lazy days on the beach, without worrying about money.