How Should a Retiree Invest Money?

You spend your working years saving and planning for retirement, but how you invest your money after retirement is just as critical. When you start to live off the assets you have accumulated, the amount of risk you can afford to take goes down, so allocating your assets properly is essential. At the same time, being too conservative could mean your portfolio fails to keep up with inflation, leaving you with less purchasing power each year.

Step 1

Gather all of the statements from your banks, brokerage firms and mutual fund companies. Add up all of your assets to see how much you have to work with. Divide your assets into different sections: one for stocks and stock mutual funds, another for bonds and bond mutual funds and a third for fixed-income investments like savings accounts, money market accounts and certificates of deposit.

Step 2

Divide your investment assets into two buckets. The first bucket should contain liquid reserves for at least five to seven years' worth of living expenses. If you have already created a retirement budget, you can use those figures to estimate how much you will need to put aside. If you have not yet created a budget, track your expenses for a couple of months and use those figures to determine how much you will need. It is best to err on the high side when setting a dollar figure for your liquid reserves. Frank Armstrong of the National Association of Personal Financial Advisors recommends this two-bucket approach to retirees who want to avoid running out of money or depleting their portfolios too soon.

Step 3

Invest the "first bucket" money for your living expenses in a combination of fixed-income investments, including high-quality government and corporate bond funds, certificates of deposit and money market accounts. The goal of this portion of your portfolio is safety. Having five to seven years of living expenses put aside in safe investments gives you time to ride out the inevitable storms in the stock market without needing to liquidate stock shares in a down market.

Step 4

For the second bucket, place the remainder of your investment assets in a widely diversified portfolio of domestic and international equity funds. All asset classes should be included in your equity portfolio, including small-cap stocks, mid-cap stocks, large-cap stocks, value stocks and international stocks. You can use index funds for your equity investing, or you can use sources like Morningstar and Barron's to seek out superior-performing mutual funds in each category.

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