You are daydreaming about your retirement. It is still decades away – you’re not that old, you remind yourself – but you can’t help envisioning all the places you will visit, the home where you will retire, not having to stress about your job anymore. Before too long, you’ve built up quite an imaginary life, and run up the bills that will go with it. You start asking yourself the tough questions: How are you going to afford the retirement life you want without your paycheck? Are you saving enough in your 401(k), and should you have started saving sooner? What if the stock market takes another big turn (or two) before you reach retirement age?
Just about everyone preparing for retirement worries about whether they are saving enough money. And recommendations vary as to how much you should target to save based on your income, expenses, and lifestyle. At the end of the day, there’s no way to predict the future. But, there are a few investments you can make in pre-retirement to ensure you’re building a robust, stable retirement portfolio, well-protected against inflation and market volatility, and prepared for the long haul no matter how long you live.
- Cash: Holding five to seven years of essential retirement expenses in money markets can buffer against having to sell other securities – stocks or bonds – at a time when their values have declined. Just as important, money market rates of return are variable, and increase as inflation drives up interest rates.
- Inflation-Indexed Bonds: Unexpected inflation spells disaster to fixed income investments, especially long-term bonds. To mitigate this risk, include bonds whose principal value and coupon increases with upward moves of the consumer price index.
- Equities (including U.S. and international stocks, and real estate): The key here is to include assets that over time have expected long-term growth rates above the rate at which the retiree is withdrawing from the portfolio. Real estate equity offers the extra bonus of being a good inflation hedge.
Besides cash, bonds, and equities, there are several other investments to consider, though they are often overlooked in the asset allocation of a retirement portfolio:
- Fixed annuities: These instruments are designed to provide income no matter how long the retiree lives and as such, they can also be useful additions to your portfolio in the place of bonds.
- Human capital: Put your professional experience, skills, and availability back to work after retirement. Retirees can offset the ravages of inflation, as well as make their portfolio last longer, by bringing in some income. Earning just 10% of monthly living costs – practically “pocket change” – can add some years to your retirement savings. What’s more, some of this income may be eligible for saving in a tax-deferred retirement account.
- Social Security: Rarely considered an “investment,” Social Security may nevertheless pay some of the best returns available to risk-averse investors, provided they are willing to forego retirement benefits until they turn 70. By delaying benefits for four years after normal retirement age, a retiree can increase their benefits by 32 percent over what they would receive earlier.
These investments are just ideas – starting points for a prudent pre-retirement portfolio. The best pre-retirement investment: spending time and money to partner with CFP® professional to help build a pre and post retirement financial plan and portfolio individualized to your specific retirement needs and dreams, and that’s built to last through the many years of retirement.