How to Invest After Retirement

No one invests in a vacuum. Your investments are affected by a plethora of volatile factors over which you have little or no control, such as inflation, political upheaval, unemployment rates and positive or negative financial news. Two things you can control are how much money and where you invest, both of which might change significantly as you age. How you invest after you retire will likely be quite different from the way you invest during your prime earning years.

Step 1

Determine your current financial condition. As with any road map, to know how to end up at your final destination, you have to know where you are. Financially speaking, that means you need to know how much money you have coming in, how much you have going out, and what your assets and liabilities are. Start by creating a net worth statement. This is a simple two-column form on which you list all of your assets in one column and all of your liabilities in the other. Total both columns and subtract your liabilities from your assets. Whatever remains is your net worth. Next, create a cash flow statement. This is another two-column form with all of your regular income from all sources in one column, and all of your regular expenses in the other. Total both columns, then subtract your expenses from your income. Whatever is left is your cash flow.

Step 2

Determine your current and anticipated future needs. This part of your financial plan is as much art as science because no one can reliably predict the future. Use your cash flow statement to determine how much money you need to live on each year, and multiply that figure by the number of years you expect to live after retirement. According to Forbes magazine, if you retire at age 65, you can expect to live for at least another 14 years. Subtract your known income sources -- such as Social Security, pensions and/or 401(k) and IRA money -- from the amount you need to live on during your retirement. Whatever is left is the amount of money you must have available in your savings and investments to draw on during your retirement years. If you don't have that much available, you'll need to produce some additional income to make up the difference, or else lower your income expectations.

Step 3

Make an investment plan that suits your level of risk tolerance, while best meeting your needs for growth and income. Consider that you will likely be drawing on your principal as well as any earnings, such as interest or dividends, which your investments might produce. Investment professionals differ on how you should invest your money after you retire, but many advocate moving toward more conservative investments, including cash equivalents and fixed income investments such as bank certificates of deposit (CDs), U.S. Treasury securities and high-grade corporate or municipal bonds. For example, the American Association of Individual Investors recommends that investors over the age of 55 hold at least 50 percent of their investment portfolio in short- to intermediate-term bonds.

Consider how your investment payouts will be taxed. Traditional IRA distributions are taxed as ordinary income, while interest from municipal bonds is typically exempt from federal income taxes.

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