What Investment Options Are Available When Retiring?
The available investment options upon retirement remain much the same as those available before retirement. However, the proportions devoted to the various categories will change, reflecting the need for reduced financial risk later in life. A further analysis of the available options takes into account the retiree's age, overall financial resources, specific financial obligations and health.
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Specific Circumstances
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Any useful re-allocation of investments upon retirement follows an assessment of the retiree and her specific circumstances. While in most instances overall earnings decline upon retirement, which often necessitates a re-allocation of investments, the particular re-allocation depends upon the retiree's health, age, race, gender and specific financial obligations. A white female in good health who retires at 50 has a projected life expectancy of more than 32 years. A black male with heart disease who retires at 70 may live no more than another decade. These somewhat stark statistics remind us that life expectancy upon retirement varies widely according to individual circumstance, and that financial planning should take these into account.
The Implications of Longevity
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In general, the longer you have left to live, the more investment risk you can tolerate because you will have longer to recover financially if you suffer a loss. However, because of the significant negative effects of inflation on savings over longer periods of time, you may also have to retain a slightly higher-risk investment profile to counter inflation-related erosion of wealth.
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Financial Obligations
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Your specific financial obligations also affect your re-allocation of assets upon retirement. If you have no immediate dependents or family obligations, your asset allocation will reflect a tolerance for moderately higher than average risk. If you have a dependent relative with health issues, you will reduce your overall risk and accept lower returns to ensure that you can provide for their needs.
Stocks vs. Bonds
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Over the long term, stocks significantly outperform bonds, and represent only marginally greater risk. Wharton Finance Professor Jeremy Siegel examined stock returns from 1802 through 2008 and concluded that with the inflation rate taken into account and assuming dividend reinvestment, the net return equaled 6.6 percent. Over shorter periods, however, the greater deviation from the average return for stocks, as compared to bonds, becomes a significant risk factor. From 1965 through 1974, the average inflation-adjusted S&P return rate equaled -37.67 percent. For the following 10 years, it equaled an inflation-adjusted -26.59 percent. As life expectancy diminishes, a retiree should avoid disastrous dips in stock returns by shifting increasingly to a mix of corporate and treasury bonds, despite the fact that in many years the return will not keep up with inflation.
Other Options
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Retirees can consider other investment vehicles that provide either guaranteed or relatively stable returns. These include annuities, previous metals and inflation-linked bonds. Other frequently recommended inflation hedges include real-estate and derivatives. Investments in derivatives may contain concealed risk, however, as the 2008 global financial meltdown clearly revealed.
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