Goal-based investing for retirement is becoming increasingly important to the modern retiree. Traditionally, the goal of investing during retirement was safety and protection or investing for income. Changes in demographics, economic circumstances and increases in average life expectancies have made planning and investing during retirement much more important and even diverse.
It is no longer enough for retirees to liquidate their assets gradually upon retiring. The retiree must continue to manage investments properly. It is not possible to conduct good planning and investment without goals. The goals of retirement investing link to the reasons for investing during retirement as well. They include:
i) Protection of retirement funds
ii) Tax minimization
iii) Risk minimization
iv) Provision of retirement income
v) Funding retirement activities and periodic expenses
Protection of retirement funds
Since retirees are normally more dependent on money working for them than full-time employees are, they are understandably very concerned about the safety and protection of their retirement funds. In the initial stages of retirement, there should be an even greater concern for protection and safety. This is because the impact of losses in the earlier stages is greater. However, once the retirement fund appreciates, the retiree can focus a larger portion of the retirement fund on higher income and capital growth.
Tax minimization
Paying tax on a fixed income that steadily declines in value is anathema to a retiree. Inflation and taxation are two sinister elements that act to reduce the outcome of investing. Retirees who invest to ensure that they leave an estate should also be mindful about the impact of estate taxes based on their net asset worth. Strategies to minimize taxes include using annuities (particularly immediate annuities) and taking advantage of available tax deductions. Selecting the appropriate investment fund has significant tax implications.
Risk minimization
Retirees must encounter several retirement risks; the way that they invest often determines how well these risks are managed. Since inflation erodes the real value of investments, it is important to maintain average returns that exceed inflation. Erring too much on the side of caution can actually result in loss of real value- if not nominal value. The longer retirement periods that many retirees enjoy compounds other retirement risks as well. Health risks are another major retirement risk that investing goals must aim to address. Although purchasing long-term care is not strictly an investment, investing in such a way that you can comfortably afford health insurance into retirement may be a win-win situation.
Provision of retirement income
Investing is more than just capital appreciation but the concept of money working for you. When investing for incoming, you should not simply put money to work just about anywhere. The main question to answer is, "How well can my money work for me?" Yielding low returns on your investment portfolio has a high opportunity cost and does not give you adequate reward for your money. Dividends or returns can be quite handy in augmenting retirement income.
Funding retirement activities and periodic expenses
When investing in general, you should diversify your portfolio according to asset classes. However, you must also diversify your portfolio according to different investment needs, horizons and goals. In retirement, you may undertake activities that involve capital outlay from time to time. Goal-based investment during retirement involves investing fragments of your overall portfolio according to your plans and contingent expenses- both in the short, medium and long term. Some expenses are not necessarily daily or even annual- although they are recurrent. Through investing, the retiree must be to be able to meet actual and anticipated needs in the future.
Conclusion
Naturally, some goals of retirement may seem to be at odds with each other. For instance, safety and protection are at the opposite end to growth. Therefore, it is important to prioritize your goals and be realistic about them as well. The quality and effectiveness of retirement investing is premised on how well you match competing retirement investment goals to your circumstances and needs.
It is no longer enough for retirees to liquidate their assets gradually upon retiring. The retiree must continue to manage investments properly. It is not possible to conduct good planning and investment without goals. The goals of retirement investing link to the reasons for investing during retirement as well. They include:
i) Protection of retirement funds
ii) Tax minimization
iii) Risk minimization
iv) Provision of retirement income
v) Funding retirement activities and periodic expenses
Protection of retirement funds
Since retirees are normally more dependent on money working for them than full-time employees are, they are understandably very concerned about the safety and protection of their retirement funds. In the initial stages of retirement, there should be an even greater concern for protection and safety. This is because the impact of losses in the earlier stages is greater. However, once the retirement fund appreciates, the retiree can focus a larger portion of the retirement fund on higher income and capital growth.
Tax minimization
Paying tax on a fixed income that steadily declines in value is anathema to a retiree. Inflation and taxation are two sinister elements that act to reduce the outcome of investing. Retirees who invest to ensure that they leave an estate should also be mindful about the impact of estate taxes based on their net asset worth. Strategies to minimize taxes include using annuities (particularly immediate annuities) and taking advantage of available tax deductions. Selecting the appropriate investment fund has significant tax implications.
Risk minimization
Retirees must encounter several retirement risks; the way that they invest often determines how well these risks are managed. Since inflation erodes the real value of investments, it is important to maintain average returns that exceed inflation. Erring too much on the side of caution can actually result in loss of real value- if not nominal value. The longer retirement periods that many retirees enjoy compounds other retirement risks as well. Health risks are another major retirement risk that investing goals must aim to address. Although purchasing long-term care is not strictly an investment, investing in such a way that you can comfortably afford health insurance into retirement may be a win-win situation.
Provision of retirement income
Investing is more than just capital appreciation but the concept of money working for you. When investing for incoming, you should not simply put money to work just about anywhere. The main question to answer is, "How well can my money work for me?" Yielding low returns on your investment portfolio has a high opportunity cost and does not give you adequate reward for your money. Dividends or returns can be quite handy in augmenting retirement income.
Funding retirement activities and periodic expenses
When investing in general, you should diversify your portfolio according to asset classes. However, you must also diversify your portfolio according to different investment needs, horizons and goals. In retirement, you may undertake activities that involve capital outlay from time to time. Goal-based investment during retirement involves investing fragments of your overall portfolio according to your plans and contingent expenses- both in the short, medium and long term. Some expenses are not necessarily daily or even annual- although they are recurrent. Through investing, the retiree must be to be able to meet actual and anticipated needs in the future.
Conclusion
Naturally, some goals of retirement may seem to be at odds with each other. For instance, safety and protection are at the opposite end to growth. Therefore, it is important to prioritize your goals and be realistic about them as well. The quality and effectiveness of retirement investing is premised on how well you match competing retirement investment goals to your circumstances and needs.
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