Contents
Should You Retire?
Can You Afford to Retire?
Retirement Money Management
Retirement Health Insurance
Life Insurance and Retirement
Housing and Retirement
Retirement and Your Social Life
Mental Activity and Retirement
Travel During Retirement
Working During Retirement
Retirement Health
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Retirement Money Management
Once you’re retired, it’s important to protect your nest egg while also trying to earn the highest possible returns on your investments. The best way to accomplish both of these goals is to follow the guidelines of asset allocation.
Asset Allocation Basics
Asset allocation is the process of divvying up your investment dollars across a variety of investment types—stocks, bonds, CDs, money market funds, ETFs (explained below), and so on—to reduce risk and maximize returns. Most financial planners say that the best asset allocation for you—the right mix of stocks, bonds, and so on—depends primarily on your age and proximity to retirement.
Asset Allocation During Retirement
Once you’re retired, it’s generally a good idea to maintain a conservative asset allocation, which means that you should own mostly lower-risk investments such as bonds, CDs, and money market funds (explained below), rather than higher-risk investments such as stocks.
A Sample Retirement Asset Allocation
Below is a suggested conservative asset allocation of stocks, bonds, and cash equivalent investments such as a money market fund. A money market fund is a mutual fund that holds very safe short-term securities. Money market funds are equivalent to holding cash, with one exception: unlike bank accounts, they’re not FDIC-insured.
The cap of a stock refers to the size, or market capitalization (value), of the company. Smaller companies have smaller “caps” than larger, more established companies. Larger companies tend to be less risky investments.
Rebalancing Your Investments
Rebalancing is the process of selling assets that have grown in value and adding to slower-growing assets in order to bring your asset allocation back in line with the ideal
allocation for your age group. Rather than allowing your asset allocation to drift out of alignment over time, be sure to rebalance at least once per year.
How to Select Investments
Often the easiest way to allocate your retirement plan funds is by using index mutual funds or ETFs (exchange
traded funds).
Picking Mutual Funds
A mutual fund is a large investment portfolio run by a professional fund manager. Most mutual funds own thousands of individual stocks or bonds. Some funds own a blend of the two. All mutual funds can be divided into two types:
- Actively managed funds: Funds in which managers make their own picks for their portfolio and actively buy and sell securities.
- Passively managed funds: Funds that invest in the securities listed in broad market indexes, such as the S&P 500®, which is a cross-section of 500 large U.S.–based companies. These funds are also called index funds.
Actively Managed Funds vs. Index Funds
Actively managed funds have higher expense ratios than index funds. An expense ratio is a fee that funds charge to cover their costs. Though you might expect actively managed funds to justify their higher expense ratios with returns superior to those of index funds, well over half of actively managed funds fail to beat their relevant index. For those reasons, index funds are often the better choice.
Tips on Comparing and Selecting Specific Mutual Funds
- Performance: Ignore the previous year’s performance and focus instead on the fund’s performance over the past 5–10 years at least. Keep in mind, however, that past performance does not determine or predict future results.
- Expenses: Avoid index funds with expense ratios above 1.00% (or 1.50% for actively managed funds).
- Manager: Focus on funds with managers who have led the fund for at least the past three years.
Picking ETFs
ETFs, which are funds that trade like stocks, are an alternative to index mutual funds. Like index funds, ETFs allow you to own a wide swath of individual stocks or bonds through just one investment, but ETFs usually offer even lower expense ratios than index funds do.
Annuities
Annuities are another type of investment option available to retirees. Offered by insurance companies, annuities work like this: you turn over an amount of money to an insurance company, and in exchange the insurance company guarantees you a certain level of income either for the rest of your life or for a fixed term. Though annuities provide a secure source of monthly funds, they also often charge much higher fees than index funds or ETFs do.
Should You Use an Investment Advisor?
Because managing money during retirement involves preserving wealth and figuring out how to spend money wisely, even knowledgeable investing enthusiasts may benefit from working with an investment advisor. Investment advisors charge commissions on investments they buy and sell for you, an hourly rate, or an annual fee based on the assets they manage. Some advisors charge a combination of various types of charges.
For advice on how to interview and select an advisor, consult your state’s securities licensing department, the National Association of Securities Dealers (www.nasd.org) or the Securities & Exchange Commission (www.sec.gov). These organizations can verify whether an investment advisor is licensed, received complaints, or committed violations.
Estate Planning
In addition to investing your money, you should make sure that your money goes to the people you want to receive it after you die by researching the basics of wills and estates (see the Quamut guide to Estate Planning, available in Barnes & Noble bookstores and online at www.quamut.com).
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