Written by Hi, it’s Dre Griggs with Obsidian Wisdom. Today, we’re answering the question, where do I invest my money after retirement? At the heart of this question is the concern of not wanting to run out of money.
Balancing Safety and Growth
We’re trying to figure out where to invest money to ensure we don’t run out, while also knowing we can’t just stick our money under a mattress. Inflation acts like a 3% loss on our money every year. To maintain our purchasing power, we need to earn at least more than inflation.
Understanding Sequence of Returns
We need to balance between growth and safety. Investing in assets that grow wealth helps ensure we won’t run out of money, but being too aggressive can lead to significant losses during downturns. This is crucial in the early years of retirement when losses are more impactful.
Six Investment Options Ranked from Safest to Riskiest
1. Certificates of Deposit (CDs)
The safest investment option is a CD. A CD is essentially a promise to leave money in the bank for a set period, earning interest. In today’s high-interest environment, CDs can yield returns around 3-5%, keeping pace with inflation. However, in lower interest rate environments, CD returns may not be as attractive.
2. Pensions and Annuities
Pensions and annuities provide a guaranteed income for life. The main difference is that pensions are offered by employers, while annuities are purchased from insurance companies. Annuities can be structured in various ways, including single life, period certain, and joint life options. The main consideration is inflation risk, as many fixed annuities do not keep up with inflation.
3. Government Bonds
Government bonds are considered very safe. The U.S. government is unlikely to default, making treasury bills, notes, and bonds reliable. These bonds provide regular interest payments, and their safety is backed by the government’s ability to tax and print money.
4. Corporate Bonds
Corporate bonds are similar to government bonds but carry more risk since companies can default. The risk varies depending on the company’s creditworthiness. Higher-rated companies offer lower yields, while lower-rated companies offer higher yields.
5. Index Funds and ETFs
Index funds and ETFs offer diversified exposure to various markets or sectors. They aim to replicate the performance of an index, such as the S&P 500, providing a balance of risk and return. They typically outperform individual asset classes over the long run due to their diversified nature.
6. Individual Stocks
Investing in individual stocks carries the highest risk. The success of these investments depends on the company’s performance. A well-diversified portfolio of individual stocks requires monitoring and regular reassessment to ensure the reasons for investment still hold true.
Combining Strategies: Core and Satellite
A common strategy is the core and satellite approach, where 75% of investments are in a core (index funds) and 25% in satellite (individual stocks). This allows for stability and growth potential, balancing risk and return.
Final Thoughts
Choosing where to invest your money after retirement involves balancing safety and growth to ensure you don’t run out of money. Understanding the risks and benefits of different investment options helps in making informed decisions. Always consider your personal situation, goals, and risk tolerance when planning your retirement investments.
If you have any additional questions, feel free to ask me in the comments. Until next time, stay safe and enjoy life.