How to Invest in Retirement Strategically

A mature couple sits on a dock by a lake and discusses how to invest in retirement

Key Takeaways

  • Dividend & interest income strategy involves generating income from dividends and interest payments from stocks and bonds.
  • Growth & income strategy combines investments for both long-term growth and income needs.
  • Bucket system strategy separates retirement assets into different buckets based on investment objectives.

When researching how to invest in retirement, you will likely find multiple investment types and various income strategies. As with all areas of personal finance, choosing the right investments and strategies depends on your financial situation and personal preferences.

Before you decide how to invest money in retirement, be sure to educate yourself on income strategies and types of investments that are available. Here's what to consider.

Income Strategies in Retirement

For many retirees, the primary purpose of their investments is to help provide a stream of income in their later years. Before choosing investments, it can be wise to consider some retirement income strategies. These include dividend and interest, growth and income, and the bucket system.

Dividend & interest income strategy

The two basic forms of investment income can be generated through dividends from stocks and interest payments from bonds. Dividends are often paid four times per year, on a quarterly basis, and interest payments from bonds are typically made on a semi-annual or quarterly basis, although the frequency depends on the individual stock or bond. If you've accumulated enough savings, you may be able to live on dividends and interest alone, without withdrawing principal. However, not all stocks pay dividends and even the ones that do may not pay them on a consistent basis.

Growth & income strategy

If you are like many investors, you may need to make regular withdrawals from your investment portfolio that exceed the dividends and interest from your investments. For this reason, you may want to consider a combination of investments that can produce long-term growth, as well as investment income.

Bucket system strategy

If your retirement assets have multiple objectives, it can be helpful to separate them into imaginary "buckets." For a simple example, your investment buckets may consist of the three primary investment assets: stocks, bonds and cash.

  • Stock bucket: This may be used as a long-term, short-term or blended bucket for money that you don't anticipate needing immediately, depending on your financial goals. This can provide potential for growth months or years down the line, or both, depending on how you invest and when you plan to sell. If you choose not to withdraw from this bucket for several years, you could let it grow without too much concern over short-term market fluctuations.
  • Bond bucket: For money you won't need for several years, you might consider a bond bucket. With bonds, you may be able to generate income while balancing the risk of stock investments.
  • Cash bucket: You might want to keep any money that you may need within three years in a cash bucket. This is the bucket from which you can withdraw money you need in the near to immediate future.

Keep in mind that investments cannot guarantee growth or sustainment of principal value; they may lose value over time. Past performance is not an indication of future results.

Choosing the Right Investments for Retirement

The primary types of investments used in retirement typically include stocks, bonds, mutual funds and exchange-traded funds (ETFs). Accordingly, there are a few things to consider when deciding how to invest in retirement.

Considerations for investing in retirement with stocks

Whether you're looking for growth, income, or a combination of growth and income, stocks may be able to help you accomplish your objective. With a dividend equity strategy, you could invest in dividend-paying stocks of companies with a history of increasing their dividends. Stocks that pay dividends can also provide long-term growth for a retirement portfolio. But again, past performance is not an indication of future results and investments cannot guarantee growth or sustainment of principal value; they may lose value over time.

Considerations for investing in retirement with bonds

When using a fixed income strategy with individual bonds, you can choose among many types, such as corporate, municipal or U.S. Treasury. You'll also choose the term (amount of time until maturity) and the coupon (annual interest rate).

Bonds have credit ratings, too. Generally, a higher rating is lower risk and has lower yields, whereas a lower rating is higher risk and may have higher yields.1

When you invest in bonds, you typically hold the bond until maturity. At the end of the term, you would receive the original principal amount invested, unless you default.

Considerations for investing in retirement with mutual funds

When you invest in mutual funds, your options may consist of stocks, bonds or a combination of the two. For retirees who don't want to oversee their own portfolio of stocks and bonds, mutual funds can be an alternative.

Here are the main types of mutual funds for investing in retirement:

  • Dividend mutual funds: These funds invest in a basket of dividend stocks, which can provide a source of current income, as well as long-term growth and balance.
  • Fixed income (bond) funds: Rather than investing in individual bonds, investors can buy a portfolio of bonds through a mutual fund. Although the value of the fund can fluctuate with the market, bond funds are generally considered to be more stable than stock funds.
  • Growth and income funds: These mutual funds may invest in stocks or a combination of stocks and bonds.

Considerations for investing in retirement with ETFs

Similar to mutual funds, ETFs invest in a basket of securities, such as stocks or bonds. Because they passively track the performance of an underlying index, ETFs tend to have lower expenses than actively managed mutual funds.

Retirees might choose ETFs for retirement investing as one way to invest in niche areas, such as dividend stocks or high-yield bonds. Since they are passively managed, ETFs may be more tax-efficient than actively managed portfolios because they tend to trade less frequently.

Planning Your Strategic Approach

When weighing your options for how to invest money in retirement, it can help to first identify your objective, such as an income or growth, as well as your risk tolerance and other considerations, to guide your strategy. Talking to an experienced financial professional can also help you determine which types of investments are right for you.

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  1. Bond Ratings.

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