Three Things to Know When Investing During Retirement

Retirees have a unique set of financial needs. When you’re no longer working, you’re left to draw on your nest egg and other income sources to cover your expenses. And with people living longer, you may need savings that can last for decades. That’s why the best retirement plans use a range of financial options to help protect people from common risks like outliving their savings, market volatility and inflation. One of the most common financial tools you’ll use in retirement is investments.

Investing in the stock market during retirement can help you grow your nest egg in order to keep pace with inflation. This means accepting some level of risk including the potential loss of money invested. But when you balance stock investments that are aligned with your risk tolerance with other financial tools like bonds, annuities, cash and even permanent life insurance, you can feel a level of comfort that you’re taking enough risk to keep pace with inflation without taking so much risk that you’re jeopardizing the savings you’ll need to live. Here are three key points to keep in mind about investing during retirement.

Investing is linked to long-term gains

When you think about the pieces of your financial plan, investments — particularly in the stock market — are for long-term growth. That’s why it’s important to stick with them, even through bouts of volatility while you’re retired.

“The one thing we know is true is that over the long term, the stock market has historically produced growth in investments,” says Andrew Weber, senior director of planning philosophy, research and guidance at Northwestern Mutual. “But that isn’t always the case over shorter periods of time. There are times when the stock market goes down quite suddenly. But generally, the overall object of investing for retirement is to grow your wealth over longer periods of time, and for that you really need to stay patient.”

In other words, getting caught up in the day-to-day fluctuations of your account balances could cause you to lose sight of the big picture. Weber says the best path forward in retirement is to stay disciplined, have a process and know what your goals are. You should have other parts of your plan, like annuities, permanent life insurance and a cash cushion, to lean on during volatile times. From there, periodic reviews of your investment plan with your financial advisor can determine if you’re on track or need to make some adjustments.

Staying invested can be a powerful weapon against inflation

“Inflation is a never-ending tax on people’s spending power,” Weber says. “The way to combat that is to have some assets that are going to grow at a rate greater than that of inflation.”

The average annual return on the S&P 500 was more than 10.5 percent from 1957 to 2022, according to data from Investopedia. While past performance doesn’t guarantee future results, it reminds us that equities have historically done well over a long investment horizon. It’s an important point in the face of inflation. While it may feel safer to keep the bulk of your nest egg in less volatile asset classes, Weber warns that it could have a serious effect on your retirement income.

“When you look at cash, you’re not going to see your accounts lose value, but what you might not realize is that you may have lost purchasing power if you hold too much cash in retirement,” Weber says. “It’s a little more insidious and less obvious. Over time, you can’t buy as much bread, milk and gas as you did 10 years ago.”

Achieving the right asset allocation is key

Your asset allocation is the mix of investments your portfolio is actually invested in. The 60/40 rule has long been a useful general rule to follow in allocating assets. It suggests devoting 60 percent of your portfolio to stocks and 40 percent to bonds. It’s a mix that has historically delivered steady returns. However, this rule considers only stocks and bonds. A solid financial plan should take into account the other pieces of your plan when deciding how much to allocate to stocks.

A mix of bonds, life insurance, fixed annuities and cash can all be considered safer assets, Weber says.

“It doesn’t involve any more risk, and you actually get more protection,” he says. “If you have something like an income annuity, you’ll essentially have a paycheck coming in every month you’ll enjoy throughout your retirement and won’t have to worry about living too long and running out of money.”

It all goes hand in hand with the kind of lifestyle you want to have in retirement. Getting clear on your income needs early can help you plan for the journey ahead. Weber says that working with an experienced financial advisor can go a long way here.

“You can go to the gym on your own and will probably get a good sweat, but if you work with a personal trainer who’s going to learn your goals and objectives, you’re probably going to work out more effectively,” he says. “A financial advisor can tailor your investment strategy and use a range of financial options to help you meet your retirement income goals.”

No investment strategy can guarantee a profit or protect against loss. Stocks/Equities have greater potential for gains as well as greater potential for loss than bonds/fixed income investments. You should carefully consider risks with fixed income securities such as bonds, these include: Interest rate, Duration, Credit, Default, Liquidity and Inflation. Interest rates and bond prices tend to move in opposite directions, for example when interest rates fall, bond prices typically rise. This also holds true for bond mutual funds. A low interest rate environment may cause losses to bond prices and bond funds you own or in the market. Interest rates in the United States are at, or near historic lows, which may increase a Fund’s exposure to risks associated with rising rates. High yield (Junk) bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement retirement income will reduce the death benefit and may affect other aspects of the policy. Indexes are unmanaged and cannot be invested in directly. Income annuities have no cash value. Once issued, this annuity cannot be terminated (surrendered), and the premium paid for the annuity is not refundable and cannot be withdrawn. Withdrawals from annuities may be subject to ordinary income tax, a 10% IRS penalty if taken before age 59 ½, and contractual withdrawal charges.