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5 strategies for investing during retirement

Retirement investing is different to investing before stopping work. Certain changes to an investment strategy occur as the goals of retired people may change over time. Learn about some of the best strategies for investing during retirement to maximise returns, while also keeping capital safe from large losses, and discover ways to get started or begin preparing.

Why is it important to have an investment strategy during retirement?

Prior to retirement, the typical goal for investors is to grow an investment account to provide enough income to cover living expenses later in life. Once in retirement, the typical goal is to preserve capital as it is needed for income. If the fund can grow a little bit, keeping pace with or beating inflation, that is great, but the best investments for retired people are typically those with lower risks.

This is because retirees need to access funds to live off them. They don’t want to see their account take a large drawdown due to speculative stock holdings at the point when they need the capital.

For those with a pension, at age 55 and above, 25% of the investment account can usually be withdrawn tax-free in the UK. This money can then be reinvested, potentially based on some of the strategies discussed below.

Strategies for investing during retirement

A study by JPMorgan found that 75% of investors reallocate their investment portfolio toward lower-risk assets once they enter retirement. This shows that retirement strategies and goals differ later in life compared to prior to retirement. Investing during retirement to maximise returns is typically synonymous with a more conservative approach to keeping retirement funds protected.

Here are several retirement investing strategies to consider.

Core-satellite investing strategy

This approach sees an investor allocate retirement capital into a conservative mix of stocks and bonds or stock and bond ETFs (exchange-traded funds​). In retirement, this is typically going to be weighted more heavily to bonds. See the conservative portfolio section below for ideas on how much to allocate to stocks and how much to hold in bonds. This investment approach is called the ‘core’, and about 80% of funds will be allocated to this part of the portfolio. An investor may adjust the percentage of holdings based on personal preference.

The other 20% of funds can be used for trading thematic equity ETFs​, or other discretionary assets that tend to produce higher returns. This can help bolster the overall return of the entire portfolio, but even if it doesn’t work out well, 80% of the retirement account may be protected in more conservative assets.

You can also learn how to invest in individual stocks​, or you can purchase diversified ETFs that already hold a wide assortment of stocks. This tends to save on commission costs since buying one ETF is often equivalent to holding 100 or more stocks.

Learn more about the core-satellite approach​.

A conservative portfolio approach

One of the most common retirement investing strategies is to de-risk invested funds as an investor prepares to leave work as well as into retirement. Younger people will often have 70% to 90% of their savings invested in stocks, with only a small amount in cash or bonds. A rule of thumb is to subtract your age from 100, and that is the percentage to invest in stocks. At 40 years old, the recommended portfolio has 60% stocks. At 80 years old, the portfolio is only 20% stocks, and the rest might be bonds (70%) and cash (10%), for example.

These portfolio weightings can be altered to suit personal preferences. The point is that the portfolio moves more toward bonds and away from stocks the older a person gets. This helps protect capital, but the bonds still help grow the account and keep pace with inflation.

See more examples of how an investment portfolio​ may be laid out.

Dividend stocks in retirement

Dividend stocks have the potential to provide a regular stream of income, potentially without investors having to sell stocks or bonds to create cash to withdraw. These types of stocks pay out cash at regular intervals, such as quarterly or monthly.

Dividends also tend to be paid by mature companies, which means more stock price stability than new companies that are still growing and tend to have more volatile stock prices.

Consider creating a portfolio with a mix of dividend stocks and bonds. As discussed above, investors tend to move towards bonds the further into retirement they get. Near the start of retirement, it may be 50% or 60% stocks. At 70 years of age, the portfolio may be 30% stocks, 60% bonds, 10% cash, for example.

Real estate or REITs for retirement investing

Real estate is considered by many as a stable asset that tends to appreciate over time. There is the option to buy real estate with some of the retirement funds and then rent the property for income. The downside is the property needs to be managed, and there may be issues with tenants or unforeseen expenses.

There is also the option to invest part of the retirement funds into real estate investment trusts (REITs). There are funds that own real estate and make money off buying and selling properties or collecting rent. The profits are paid out to shareholders in the fund, typically monthly or quarterly. This approach is like owning dividend stocks, but REITs help diversify the portfolio.

Learn about REIT investing​ in further detail.

Annuity strategy for retirement

If you have a nest egg saved up, but you are unsure how long it will last, or you are not sure if you are disciplined enough to make it last throughout retirement, then consider an annuity. How it works is that an investor pays the annuity company a lump sum, and the annuity company agree to pay a set amount monthly for a set number of years. This is called an immediate annuity.

You could also add in parameters, such as you want to be paid until you die, or you could add in death benefits. These would then affect the monthly amount received.

Annuities are not a one-size-fits-all product. But discussing this option with a financial advisor may shed light on how much you could receive each month for the capital you have.

There is always the option to use some of your capital for an annuity to guarantee income each month, and then the rest of the capital can be allocated to some of the other strategies discussed.

How to get started with investments in retirement

Here is how you could get started with managing your self-directed investments in retirement:

  1. Decide on a portfolio allocation. This is the percentage of the account you are going to put in bonds, dividend stocks, normal stocks (if desired), and REITs.
  2. Calculate what and how much you need to buy. For example, if you have £200,000 and you decide to allocate 50% of it to bonds, pick which bonds or bond funds you are going to allocate the £100,000 to. Do this for stocks and REITs as well, if applicable. ETFs can be used, or individual stocks or REITs.
  3. Monitor your investments in the trading platform to see how they perform and from here, you can adjust your portfolio weightings accordingly.

FAQs

Where’s the best place to put your money after retirement?

As investors approach or move into retirement, some financial advisors may recommend that an investment portfolio becomes more heavily weighted to less risky assets such as bonds, as opposed to stocks. This could help to protect the capital in the account, since stocks tend to fluctuate more than bonds.

What could be considered a conservative retirement portfolio?

A conservative portfolio is subjective depending on each investor, but it could typically involve one that has 70% or more of bonds, 10% to 20% cash, and 10% to 20% in stocks. This can be adjusted based on personal preference. Learn how to invest in stocks.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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