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Money and Retirement - Investments in Retirement

Investing in retirement is no different than investing for retirement.  You determine your appropriate risks and term of investment, then create a portfolio that allows you to meet your goals.  The only difference is that you need to plan on liquidating assets during retirement, so you should always have plenty of money in a short term, stable, liquid asset that you can use to make withdrawals.  Also, there is some account planning that you need to do to ensure that you are tax optimized and in compliance with any retirement plan mandatory withdrawal rules.

The Right Investment Mix. Some people think that when they retire they should sell all their stocks and own only bonds and CDs or money market funds.  This is not true, especially if you are retiring early.  Remember, you are investing your money until the end of you and your spouse's life, not until you retire.  The younger you are the more exposure you should have to stocks.  Finding the right mix for you will be different than for other people because you have different accounts, risk tolerances, spending patterns, etc. 

I'm sure you've heard the age old adage that if you subtract your age from 100, this is how much stock you should own. So if you are 50 you should own (100-50) 50% stocks.  Although this may be okay for some, if you are 50 and have 30-50 years to invest for, why would you only own 50% in stocks?!  Different money managers and financial planners will give you different ratios to own, but in our opinion, if you have more than 25 years to invest, you don't need to own many bonds or cash account yet.

Perhaps the most important thing to look at in your retirement investments is the diversification.  When putting your portfolio together, make sure that you are well diversified.  Invest across different market caps (large, medium and small), across different sectors (technology, materials, real estate, health care, oil, retail), different regions (US, Asia, Europe, South America), different risk markets (developed and emerging markets), and across different growth stocks (dividend, income, growth).

Managing Your Retirement Accounts.  You'll have to be aware of tax implications and mandatory distributions.  For example, if you are 60 and retired, you can withdraw money from your non-retirement accounts without having to pay any income taxes (except for any capital gains).  However, when you withdraw money from your 401k or traditional IRA, you'll have to pay income taxes on the entire amount of withdrawal.  Also, when you hit 70 1/2, you'll have to start making minimum withdrawals from your 401K and IRA.  Make sure that you invest each account accordingly to maximize the tax implications of these withdrawals.

For example, if you are 60 years old and won't need to withdraw from your 401K or IRA until you are 70 1/2, then you should have the 401K and IRA invested in faster growing investments, so that they can grow tax free for the next 10 years.  And you should keep the cash you'll need for the next few years invested in safe money market, savings, or CDs in your non-retirement accounts.  That way you won't need to pay as much tax on the earnings because your higher return investments will be tax deferred and only your low rate of returns will be taxed.

You should also study social security benefits closely to determine when you should start claiming them.  The longer you wait, the higher the monthly payments will be.  If you are in good health and don't need the money right away, it probably makes sense to forego the payments until the future.  This will also help lower your taxes because social security payments are taxable.

So, in summary, to find the best investments for your retirement, invest your money at a risk level that you are comfortable with, and remember that it is just as important to manage your retirement and non-retirement accounts as it is to manage your retirement money.


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