Saving for retirement is hard. However, when you are still working, creating a retirement investment plan can be comparatively straightforward. The goal is to simply grow the money. But watch out! When you retire, your investment goals become multi faceted, layered and — let’s face it — down right complicated.
You still want your money to grow, but you should take less risk and you have a whole lot of other factors to consider.
Here is a look at 6 competing priorities you need to balance for a solid retirement investment plan as you retire:
1. Return on Investment and Risk
Just like when you were working, a decent return on investment is important after you retire.
However, you probably should not take as much risk in order to get higher returns. When you are young, you are investing for the future and therefore have time to make up for losses you might incur. When you are older, you need the money to be available and you simply don’t have as much time to recover from a downturn.
2. Return on Investment and Inflation
So, let’s say that as you retire, you want to minimize the risks to your savings. If you have saved up enough money, why not just convert the assets to cash and sit pretty?
There are many reasons, including the very good reason: INFLATION!
To retain your buying power, you need your money to earn a rate of return that is at least equal to the rate of inflation. For example: if you are earning a 3% rate of return on your savings and inflation is at 3%, then your “real rate of return” would be 0%. The purchasing power of your money has remained flat. Even though you earned money, you can not buy more now than before.
While inflation has been historically low in recent years, this may not always be the case. Furthermore, low inflation is not uniform across our economy. Many costs incurred by retirees, such as healthcare and related, are experiencing much higher levels of inflation that indicators like the Consumer Price Index (CPI) might indicate.
To illustrate how devastating inflation can be, let’s look at the impact of 3% annual inflation on your spending power. Note 3% is around the long-term historical norm.
Using the rule of 72, an annual rate of inflation at 3% will cut your spending power in HALF over a 24-year period. For someone retiring at 65 this would occur by age 89. With longer life expectancies retirees should put the risk of inflation at the top of their list of retirement concerns.