A Richer Retirement

Invest Smarter and Enjoy Retirement More

Retirement is an exciting goal: time to pursue your passions, relax, and enjoy everything you’ve worked for your whole life. But it also brings new challenges—not the least of which is figuring out how to fund your new lifestyle when you’re no longer receiving paychecks every month. Most retirees rely on investments to fund at least part of their retirement, and investing success can mean the difference between scraping by and living it up in your golden years. This handbook is designed to help you secure a better, longer, richer retirement for yourself by making the most of your savings both before and during retirement.


How Will Your Goals Change In Retirement?

Often, people first become interested in investing as they approach retirement, or after retiring, when they have more free time and a more direct interest in how their investments are faring. Even people who have been saving for retirement their whole lives often leave the investing up to their 401(k) or IRA manager during their working years. If you’re one of these investors, you’re in good company and can get up to speed quickly.

On the other hand, if you’ve been an investor your whole life, you might be wondering what will change once you retire, or how you should adapt your strategies to retirement. This guide can help you there too.

How Is Investing For Retirement Different?

If you’ve been investing for a long time already, you’ve probably pursued capital appreciation as your primary goal. That means buying investments that you believe will go up in price, then selling at some point, once your initial investment has increased in value.

Capital appreciation is still important for retirees, but most will also have an additional goal: income.
You may have used an investment account to save and earn money for a big purchase in the past, like a house or college education. Once you had enough—or it was time to send your kids to college—you withdrew a big chunk of money. But most of the time, investing when you’re still earning is more about making money than taking money out.

In retirement, you still want to make money, but you also probably want to cash in some of your investments to pay for things. That can mean selling a chunk of stock so you can afford a luxury cruise, or just withdrawing a little bit every month to pay the bills. Or both.

For investors who’ve spent all their lives adding to their nest egg every month, helping it grow by carefully choosing the best investments, it can be stressful, disorienting and even a little scary to suddenly start doing the opposite. Even with the money there, you might not be sure how much you can use, and that might keep you from going on that cruise, or make you anxious about paying your bills every month.

Especially if you’ve invested for a long time, and are used to having capital appreciation as your number one goal, actually using the money you’re earning can be difficult to reconcile with your investing strategy.

That’s why this guide presents investments and strategies that are just for retirees and those planning for their retirement. It can help you be as comfortable using your savings as you are investing them. I’ve included detailed information on a variety of investments that make it easy to fund your post-paycheck life by generating passive income every month or quarter. I’ll also introduce strategies for adapting your portfolio to your life situation, so it can meet your needs at every stage of pre-retirement and retirement.

With the right strategy and the right investments, your retirement can be richer, less stressful, and more fun.

How Much Income Do You Need?

Before we get to the nuts and bolts of creating that income-generating portfolio, you’ll want to set some goals for your investments. There are many different ways to approach this, each with their strengths and weaknesses. We’ll begin with an approach you’ve probably seen before: the “retirement calculator.”

Many advisors think these calculators have more weaknesses than strengths, and we won’t argue. Most use an average annual return on investment to calculate investment returns, which can create unrealistic projections. They also assume that you can roughly estimate your annual spending for the next 30-plus years. But even using generous assumptions, it’s hard to account for unanticipated expenses, like medical bills. It also oversimplifies retirees’ spending habits—many retirees can and do adjust their spending when their circumstances change, which the calculators don’t account for.

But despite their drawbacks, running some numbers through a retirement calculator can give you a good starting point for deeper planning.

If you’ve already used one of these calculators, feel free to plug in those numbers in this exercise. If not, the retirement calculator below accounts for more variables than most, including “modern” retirements where you’re still earning some income. Give it a try here:

Some of these numbers are almost guaranteed to change, but filling out the worksheet will give you a starting place for your income investing.

How Much Income Can You Expect?

While retirement spending calculators can give you an idea of how much income you’ll need to generate in retirement, they also make a lot of assumptions. Expenses are very difficult to predict—especially health-related expenses—and these calculators usually don’t take into account retirees’ ability to adjust for changes in life circumstances. If you have higher medical expenses one year, for example, you may choose to cut back elsewhere rather than dip into your savings.

Another thing you can’t control is the market. Over a long enough period of time, the stock market’s trend is up, but it’s impossible to predict what it will do from year to year. Even expected equity returns based on historical averages are just guesses.

Bond yields introduce more uncertainty: many calculators still assume today’s “unusually” low bond yields will return to their historical averages sooner or later, but there’s no reason to believe that will be the case. Many analysts forget that until the mid-1950s, the dividend yield on the S&P 500 exceeded the yield on 10-year treasury bonds for decades. It’s easy to assume the next 50 years will look more like the 1960-2010 period than the 1900-1950 period, but there’s no inherent reason that should be the case.

All these uncertainties can make planning for retirement seem futile. But don’t despair. You don’t have to know exactly what’s going to happen in the future to make a solid plan.

When you pack for a vacation, you don’t know exactly what the weather will be like, but you can still plan fairly well based on forecasts. If you’re going to San Francisco in June, you can find out that the average high that month is 66º and the average low is 53º, and be reasonably sure you don’t need a heavy coat, but you’ll probably want a jacket. If the weather turns out to be unseasonably warm during your trip, at worst, you’ll regret the wasted space the jacket took up in your luggage. You can also look at the average number of rainy days in June and decide whether to bring a raincoat or umbrella. In San Francisco, it rains about 13% of the time in June. If you decide not to bring a raincoat, and it rains one day of your trip, you’ll probably think you made the right call. If it rains every day of your trip, you’ll wish you’d brought a raincoat and umbrella! But the odds of that happening are so small, the possibility of it happening doesn’t necessarily make it worth packing the extra items.

Retirement planning is, believe it or not, similar. It’s impossible to know exactly how your portfolio will perform over the next 10, 20, 30 or more years, but you can predict a range of likely situations, and position yourself accordingly.

Vanguard has made a valuable tool available on its website that runs a Monte Carlo simulation on your current retirement savings to generate a range of possible outcomes and probabilities for each. A Monte Carlo simulation approximates the probability of certain outcomes by running multiple simulations on your inputs and measuring the frequency of each. You can access the tool at the address below:

Tools like this avoid predicting exactly what will happen, but can give you an idea of a reasonable expectation for your investments.

Required Miminum Distributions (RMDs)

Another useful prediction tool is the IRS’s own regulations governing RMDs, or Required Minimum Distributions. The IRS requires holders of most retirement accounts to withdraw a certain amount of the balance each year. The RMD rules apply to all employer-sponsored retirement plans including traditional IRAs, profit-sharing plans, 401(k) plans, Roth 401(k) plans, 403(b) plans and 457(b) plans. However, the RMD rules do not apply to Roth IRAs while the owner is alive. The IRS requires holders of these accounts to start taking RMDs in the year they turn 70½ (unless you’re still working).

Even if your plan isn’t subject to RMDs, the IRS’s guidance can be useful in determining how much you can spend each year without depleting your principal. That’s because the IRS calculates RMDs by dividing the year-end balance by a life expectancy factor (listed in IRS Pub 590) so they’re responsive to the changes in your account balance each year.

You can find out how much the IRS recommends you withdraw each year using FINRA’s RMD calculator, available at:

This tool is also useful because it calculates the return you have to achieve over the next 12 months to maintain your current account balance.

For example, a 75-year-old retiree with $400,000 in her IRA at the beginning of the year would be required to withdraw $17,467.25 this year. After the withdrawal, she’d have to achieve a 4.57% return on her investments that year in order to maintain her account balance. Of course, some investors will want or need to withdraw more than the RMD each year, which will change the rate of return needed to maintain the account balance.
Most investors won’t generate exactly the target rate of return every year—in some years your returns may be better, and in some they may be worse. But if your returns average close to the target rate over time, the RMD calculator can help make sure you don’t run out of money partway through retirement.

Calculating this rate can also help you target an annual yield for your portfolio. Many retirees, unsure how much income they actually need, buy the highest-yielding investments they can find, often taking on more risk than they’re comfortable with in the process. If you know how much yield you need from your portfolio, it can help you choose investments that will fulfill that quota.

Do note that some sources say the IRS’s calculations are on the conservative side for younger retirees.

Determining Your Risk Tolerance

Running simulations like the one above can give you some idea of how much risk you’re willing to introduce into your portfolio. We often hear from retirees who assume that because of their age, they should be investing very conservatively, in the lowest-volatility investments they can find. But we’ve also talked to retirees in their 80s who love fast-growing, hit-or-miss momentum stocks. And the fact is, if you’re already retired but know you still need to be focused on growing your nest egg, the safest, lowest-volatility investments are simply not going to meet your needs.

The most important consideration when choosing what type of investments you will buy is your personal investing style. Some investors love buying cheap stocks and waiting patiently for them to go up. Others get bored waiting around for value stocks to get moving and would much rather buy an “expensive” but fast-moving stock and sell it after a few months.

Financial advisors will try to tell you that you have to invest a certain way based on your age or your portfolio size… or whatever products they’re selling. But knowing what type of investing you’re best at and most comfortable with is invaluable knowledge. If you’re a round peg, trying to force yourself into a square hole is going to be both counterproductive and costly.

A Monte Carlo simulation like the one run by Vanguard gives you a different way to look at risk. Rather than assuming you should only be investing in conservative, low-risk investments because of your age, running such a simulation can help you quantify actual risks of various investment strategies.

The lowest-risk strategy, of course, is keeping your savings 100% in cash. The only variable in this simulation is inflation (putting aside variables on the cost side like unanticipated expenses and how long you live), so there are few risks to account for. If you’ve saved $2 million, for example, Vanguard’s calculator assures you that you can spend $50,000 per year and still have 100% confidence that your savings will last 30 years in cash. On the other hand, if you start with only $1 million in cash, you’re guaranteed to run out before 30 years are up.

Both these situations minimize risks, technically, but only one is a viable retirement strategy. It’s important to wrap your head around the concept of risk as more than the concept of the unknown.

Risk can be quantified, and sometimes you will choose to take risks. The investor who has saved $1 million and wants to spend $50,000 a year for 30 years would be much wiser to take some risks with his money than to try and eliminate risk altogether. Using this situation again but allocating 60% of the $1 million to stocks, 30% to bonds and 10% to cash, the Vanguard simulator calculates a 79% chance that his money lasts 30 years. That’s not a low-risk situation—his money ran out in 21% of simulations—but it’s certainly preferable to guaranteed poverty. (As a side note, even with 100% of the money in stocks—what most investors would consider a “higher-risk” allocation—the Vanguard simulator still finds that the money lasts in 78% of simulations. But with 100% in “low-risk” bonds, the money lasts in only 32% of simulations. So risk doesn’t always work how you’d expect.)

Set Goals for Growth

As discussed in the previous section, the “safest” course isn’t always the most desirable. Most investors will be more like the man who has saved $1 million than the one who has saved $2 million. In other words, you’ll need and want to keep your nest egg growing in retirement, even while you’re simultaneously using it for expenses.

The Monte Carlo simulation we ran above uses historical returns to approximate the growth of your portfolio every year. Rather than using an average historical return like many retirement calculators, the simulation chooses a random year’s stock, bond and cash returns to use for each year of each simulation. So each simulation includes the returns from 30 random but historical years. Some simulations will include bumper years like 1995 when the stock portion of your portfolio grows by 30% or more, and others will include years like 2008, where it shrinks by over 30%.

While that’s a sophisticated way to model possible returns in a variety of market conditions, it’s not a constructive way to think about your own investing. Unless you plan to invest exclusively through broad market indexes, you can target much more nuanced returns in your own portfolio.

Below is a graphic based on allocation models created by Fidelity, which offers some useful retirement planning tools on their website. Although the allocation models are simply suggestions, considering the average historical returns of the range of asset allocations is a very good idea.

The average returns, visible in the last row of the bottom table, range from 3.46% to 10.11%. This is a fairly realistic range of target returns for the average investor.

Of course, the higher the return you target, the more variability you’re likely to see from year to year. No one achieves a 10% return consistently, year after year. But you can average 10% over time if you make 163% in your best year and -67% in your worst year, as the table shows for the “most aggressive” allocation.

Based on the numbers you generated using the retirement calculators above (or your actual spending and income, if you’re already retired), you should have an idea of what kind of return your investments need to be generating. Now take a look at the best and worst annual returns in that column, to get an idea of the kind of volatility that comes with targeting that annual return. Most investors well into their retirement can’t afford to lose 40% a year (the worst annual return for the “balanced” mix), even if it will eventually be offset by a good year (the worst 30-year return for that strategy is still 6%.) That’s why older investors invest heavily in conservative securities with lower volatility, which generate more predictable returns, even if they are lower overall.

In the next section, we’ll help you combine this knowledge with what you know about yourself to figure out what strategy you should follow and what kind of investments you should own, now and in the future.

Allocation and Diversification

Now that you have some idea of your goals for retirement, it’s time to get down to the nuts and bolts of accomplishing those goals.

In all likelihood, you will use a variety of investments and strategies, and you’ll probably change and adapt your strategy and allocations several times. Most investors want to invest more aggressively in pre-retirement, so they can build up as large a nest egg as possible, and then gradually become more conservative over time as their margin for error decreases. But not all investors will follow this pattern: You might have begun retirement in a very conservative position, concerned about living on your savings, but maybe you’ve done well and are now ready to get more aggressive.

Wherever you are, there’s an investing system that can help you accomplish your goals. The next section will help you find it.

Find The Right Investing System For Your Goals

Your goals are likely to change over time, but, beginning in the present, let’s try to match the goals you determined above to the right investing system. Note that you may wind up mixing and matching investing systems to prioritize different goals in different parts of your portfolio. The following table is simplified but will give you an idea of which systems are most appropriate for which goals.

First, find your primary goal on the left, then follow the rows across to see which systems can help you accomplish it over the short, medium and long term. (For our purposes, short-term strategies focus on returns in the next 12 months or less, medium-term investors invest for roughly the next six months to three years, and long-term investors focus on returns over multiple years or even decades.)

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