Post-retirement saving tips

July 20, 2008|By Janet Kidd Stewart

A retiree recently wrote to Your Money asking for suggestions on where to invest the savings he has been generating by not spending all of his retirement income. He has $30,000 in a taxable savings account, but the bulk of his income is generated from retirement accounts.

He's looking for longer-term returns, not income that he can spend right away.

But he may be locked into the assumption that because he can no longer contribute to his individual retirement account, his options for investing in his taxable account should be limited to ultra-safe bank products.

Experts, however, said he's not putting enough importance on managing the taxable account for a long-term horizon during retirement.

Karin Maloney Stifler, president of True Wealth Advisors in Hudson, Ohio, said more retirees are realizing the need to continue to save after retirement - and to take a broader view of how post-retirement investing should look.

"In down markets, people are more likely to not spend everything they have," she said.

Stifler believes many consumers (particularly those on a fixed income) pull back in an economic downturn and end up actually saving, even as prices rise.

With inflation escalating, however, it's not enough to simply sock those savings entirely into investment products with a very short-term horizon, she said.

Experts said retirees need to keep three ideas in mind: Don't forget to diversify long-term investments, even in your taxable account; don't underestimate the importance of nonretirement accounts in your retirement plan; and structure the portfolio so you aren't selling in a panic to raise cash for everyday expenses.

Stifler urges investors to segregate a portion of their taxable accounts for living expenses in the next few years. She typically uses two to four years' expenses for this shorter-term account, depending on the client's individual circumstances.

The remainder needs to be invested for a longer horizon, with all the asset diversity of a long-term portfolio designed to outrun inflation.

"The first step is to assess what is the job of each pot of money you have," Stifler said. "When is the soonest I might need this money; do I need quick access or could it be used to build a war chest for down the road?" Any money with a longer time horizon needs to be diversified more broadly than into a pile of individual stocks that pay dividends or a blue-chip stock index, the planner said.

The new "safe" portfolios are those that also include exposure to real estate investments; international stocks, including emerging markets; and smaller U.S. stocks, she said.

But these asset classes have been far from havens recently. The point is that with liquidity needs taken care of in the near term, an investor can substantially reduce the risk in a portfolio by diversifying a taxable account as well as retirement accounts.

Studying various reactions to the 2000-2002 bear market and making projections for an ensuing 30-year retirement, investment giant T. Rowe Price found that fleeing stocks at the beginning of 2003 for an all-fixed income portfolio was, by far, the least successful strategy. Cutting back on spending, or not adjusting withdrawals for inflation, had a more positive effect on portfolio success rates.

Finally, it may not be just what's in your taxable account that matters, but how big it is relative to your tax-deferred accounts.

There is an optimal mix of tax-deferred and taxable investments at the start of retirement, depending on your overall level of assets, your spending rate and your age, according to new research from financial planner Ben Bernacchi, owner of Bernacchi Financial Services in Murrysville, Pa.

Beginning with an investor who retires at 60 with $1 million, initially withdraws 6 percent, and lives another 30 years, Bernacchi found that overall portfolio results in those decades varied widely depending on the percentage of money that was in taxable accounts at the start of retirement.

The upshot: In general, the earlier someone retires, the greater the proportion of assets she should have in taxable accounts at retirement.

Particularly for people retiring well before 70, the year when IRA account holders must begin withdrawing required minimum distributions, taxable accounts are vital for providing streams of income that avoid ordinary income taxes, Bernacchi said.

His results are published in the July issue of the Journal of Financial Planning.

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