Investing Guides: Tips For Investing During Retirement To Maximize Returns

How to invest in your retirement years, to make your funds live as long as you do.

Maximizing investment returns during retirement requires many of the same disciplines necessary before retirement along with some new ones resulting from the need to liquidate assets. It is important to remember that many people are spending many years in retirement. If you are age 65, you have about a 50% chance of living past 80. Therefore, you still have a significant investment time horizon even once you have reached retirement age.

Because of the possibility of a lengthy retirement, inflation is an important consideration. A dollar now is worth more than a dollar tomorrow. Over a 15-year or longer period, inflation can seriously degrade the value of an investment portfolio if it does not maintain significant exposure to stocks. A conservative portfolio invested only in bonds simply cannot keep up. Therefore, to maximize investment returns in retirement, a sizeable allocation to stocks is essential.

Another important decision is your asset withdrawal rate. Lower withdrawal rates increase retirement investment returns by leaving more of your capital invested. Furthermore, lower withdrawal rates make it less likely that you will outlive your retirement savings. Experts recommend withdrawal rates of 3% to 4% in order to provide a reasonable assurance that a 65-year-old will not outlive his or her savings.



A third consideration is the costs of your investments. Costs, whether they are from commissions, mutual fund management fees, or fees for financial advice, all conspire to lower returns. While it may be too costly from a tax perspective to make radical changes in your investments, investing in lower cost vehicles throughout your lifetime will boost returns.

Taxes also act to reduce investment returns. Investing in tax efficient vehicles, like index funds, in taxable accounts and taking maximum advantage of tax-deferred and tax-free retirement plans like 401(k)s and Roth IRAs go a long way toward minimizing your tax burden. As you find it necessary to sell investments in retirement, it is advisable to begin with taxable accounts having long term capital gains. Once these are exhausted, then move on to tax-deferred accounts like 401(k)s and traditional IRAs. Conclude with tax-free accounts consisting of Roth IRAs.

By proceeding with asset sales in this order, you minimize your taxes and enhance your retirement investment returns. Long-term capital gains are taxed at rates lower than regular income, so they should be recognized first. This allows your tax-deferred and tax-free accounts to compound as long as possible. Tax-deferred accounts are taxed at regular income rates, and you are required to begin taking distributions from them at age 70 ½, so they are sold next. By waiting to use Roth IRA assets last, you allow yourself the maximum amount of tax-free income in retirement. In addition, you are never required to take a distribution from a Roth IRA, so it is also a good vehicle for passing on an inheritance if you desire to do so.

The last element to maximize your retirement investment returns is to keep enough cash on hand to meet unexpected expenses. Having to liquidate assets during a market downturn is a sure way to hurt your investment returns. By keeping a cash reserve in a very safe and liquid investment, you can let your long-term investments ride out downturns even in the face of an emergency expense.

Remembering that your investment time horizon is still probably quite lengthy even once you have reached normal retirement age is the key to maximizing your investment returns in retirement. By continuing to be exposed to stocks, minimizing investment costs, and working to control your tax liability, you can make the most of your retirement savings.

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