Retirement causes us to rethink many things in our lives. One area that has a long-lasting impact on the quality of our retirement is whether our investment strategy should change. As Christians enter retirement, their investment strategy is an important part of their stewardship responsibility. This post examines some of the factors to consider, how to think differently and important points to consider as you enter this new phase of life.
Transitioning to Retirement
One of the most common conversations I have with clients nearing retirement, is about reducing the risk of their investments. Many clients feel they need the bulk (or all) of their assets either invested conservatively or producing income to meet their current needs, with nothing providing future growth. This is not an uncommon sentiment, but one that requires a bit more thought.
The temptation to reduce investment risk at retirement happens for a few reasons:
- Needing Income – Once our paychecks stop, we may have significantly less income every month. It can cause our focus to shift from providing for the future (growing assets) to providing now (investing for our present income needs).
- Decreasing Assets – When we need more income than our investments can produce, we start to dip into principal. Having more money going out than coming in, can be very uncomfortable.
- Fear – We can begin to fear running out of money or that a market decline will wipe us out. As we are older, we won’t have the time to make the money back. When fear clouds our judgment, investing conservatively can feel safer and logical, but can lead to other problems.
There is some truth with each of these concerns, but with wise planning you can receive both income for current needs and growth for future needs. We need to be careful to not become too conservative in our investments, balancing our newfound caution with our future needs.
Why Do I Still Need Growth?
There are four main reasons retirees need at least some growth:
A. Longevity
Americans are living longer than ever. If a married couple reaches age 65, on average, at least one will live to age 93. If you retire at age 67 and live to be 93, your assets need to support you for 26 years. That is a long time. If you are too conservative in the early years of retirement, it can have a major impact on the later years of your retirement.
B. Inflation
Over the past 50 years, the value of the dollar has decreased by approximately 3.8% a year. This understates the true inflation rate, as the calculation has been adjusted by the government over time. However, the point is that every year our dollar buys less.
C. Long-Term Care
It is estimated that 70% of Americans will need long-term medical care before they die. The average annual cost of skilled nursing in the US is $104,000. Health care inflation is rising at a faster rate than general inflation, so these figures will only continue to compound against you. Investing in assets that can potentially keep up with inflation is crucial.
D. Investment Returns
Different types of investments have performed differently over time.
Historical Investment Return from 1974-2023 (geometric average)
| Investment Type | S&P 500 (dividends reinvested) | 3 Month Treasury Bill | US Treasury Bond (10 Yr) | Baa Corporate Bond* | Real Estate | Gold |
| Average Annual Return | 11.10% | 4.30% | 6.12% | 8.49% | 5.40% | 6.01% |
Source: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
The more conservative types of investments tend not to perform as well over the long term as growth types of investments. It is important to create a mix of investments to provide both growth and income.
Important Note – when I am talking about growth or investing more aggressively, this means investing more assets into stocks or stock based investments. This is not a recommendation to invest in risky areas of the market or investments you have not used before.
How To Get Started
The key to investing in retirement starts with a basic retirement income plan. This is a fairly easy process.
First you calculate your income. This would include:
- Social Security benefits
- Pension (if you have one)
- Interest
- Dividends
- Part-time employment income
- Any other income
Second, you calculate your expenses. This would include everything you pay for in a given month. Some of your expenses may be paid one or two times a year, so you will want to divide them by the number of months to arrive at a monthly figure.
Once you have calculated your income vs your expenses, there are three potential outcomes:
- You have too much income – If you are in this situation, you have more than enough to meet your monthly expenses. You can afford to take more risk with your investments to provide for future needs.
- Not enough income – You are not able to take as much risk with your investments, as a greater portion needs to be set aside to generate income for the present. Once your income need is met, the remaining assets can be invested more aggressively.
- Just enough income – You will want to set aside some funds to provide additional income in the coming years due to inflation. The remaining assets can be invested more aggressively.
Investment Options
If you have an income need, there are a number of different investment options that can help. Here are a few to consider:
Immediate Annuity
One approach is to buy an immediate annuity that will provide income for the rest of your (and possibly your spouse’s) life. The payout can cover your core monthly expenses, freeing the rest of your investments to be invested more for growth.
Bond Ladder
Using a portion of your investments to buy individual bonds at regular intervals (say 1,3,5,7, 10 years) will provide income for current and future expenses. The remainder of your assets can be invested for future growth.
Dividend Producing Stocks
Investing a portion of your assets in stocks that pay growing dividends, may help you keep pace with inflation. They can serve a dual purpose of meeting future income needs, while also providing growth potential (if the stocks increase in value).
Putting It Together – The Bucket Strategy
Some retirees find it helpful to use what is called the bucket strategy to divide their assets to meet different needs. One bucket may be investments that provide current income, another future income and another could be longer term growth. Each bucket is intended to meet a current or future need, and it allows you to invest to meet those specific needs.
For example, if a person had $1 million and needed an additional $20,000 in income each year, here is how it could look:
Bucket 1: Income
$500,000 invested in a bond ladder at 4% will provide $20,000 a year in income
Bucket 2: Future Income
$100,000 can be invested in dividend producing stocks to provide additional future income
Bucket 3: Growth
$400,000 can be invested more heavily in stocks to provide for future growth
The bucket strategy enables you to clearly define what assets will be used to meet the various needs you have. It allows you to refine your investment strategy so you can take as much risk as possible, rather than managing all of your assets to meet a current need.
Important Considerations
Have Faith
Matthew 6:26-27 Jesus said “Look at the birds of the air: they neither sow nor reap nor gather into barns, and yet your heavenly Father feeds them. Are you not of more value than they? And which of you by being anxious can add a single hour to his span of life?
We need to balance making wise decisions and having faith in the promises of God. Plan as if everything depends on us, but know that everything depends upon God. Striking a healthy balance between the two is essential.
Waiting Too Long
Ecclesiastes 11:4 “He who observes the wind will not sow, and he who regards the clouds will not reap.”
It can be very easy to delay determining your retirement income needs due to inertia or waiting to make investment decisions because market conditions are poor. There will always be reasons to delay, but we need to be diligent and make the best decision now, rather than wait for a better time.
Fear
It can be very difficult psychologically to enter retirement. For some, this is the first time where more money is going out of your accounts than coming in. This can lead retirees to pull back significantly on taking risk with their investments. There is risk with every decision we make in life. Not allowing fear to cloud our judgment at this critical time is essential.
Real Estate
As we age, it can be more challenging to manage real estate investments. Do you want to be dealing with rental real estate issues in your 80’s? Thinking through how to manage your real estate portfolio is crucial.
Tax Advantaged Accounts
Your Traditional and Roth retirement accounts are tax advantaged. Putting investments that may owe more in taxes over time can help reduce your tax bill. Also, placing more aggressive investments in those accounts can make sense, as there will not be any capital gains tax owed on them when you sell.
Financial Advisor
What got you here, will not necessarily get you where you need to go. Working with a trusted Financial Advisor can help you navigate this new stage of life.
Final Thought
As you transition into retirement, your investment strategy should reflect your changing financial needs and goals. The shift from asset accumulation to preservation is significant, but doesn’t necessarily mean abandoning growth entirely. Finding a balance that works for you is key.
Embracing life’s changes and adjusting to market fluctuations can empower you to navigate retirement with confidence and finish well.
