Retired Investing Overview

Managing your investments after retirement is not a simple process. It entails at least ten steps:

(1) You decide on your target annual income.

(2) You estimate how much of this will be provided by your national social security system, by annuity income received from defined benefit pension plans in which you participated, and by income from any post-retirement employment. If the sum of these sources is less than your target income, the balance must be provided by withdrawals from your accumulated portfolio of real and financial assets.

(3) You decide how much money you want to save, either for precautionary reasons (e.g., to cover possible long-term care costs) and/or to leave as bequests. 

(4) You estimate how many more years you and your spouse will live.

(5) You decide whether to convert some or all of your savings to an annuity. You also make a closely related decision: whether to treat your accumulated housing equity as a source of income (via a reverse mortgage), or as part of your precautionary savings and/or bequest.

(6) Now that you know the annual income that your financial assets must produce, you see if there is an asset allocation strategy that has an acceptable probability of achieving your target income (withdrawal) and savings goals, within the risk limits you set. If there is not, then you must either change your goals, or increase the amount of risk you are willing to take.

(7) Once you have identified your optimum asset allocation strategy, you decide whether to use an actively managed or indexed approach to implement it.

(8) You select investments that are consistent with the approach you chose.

(9) You determine the most tax efficient way to hold these investments.

(10) Finally, you check performance and re-evaluate your plan at appropriate intervals to make sure you're on track to achieve your goals.

This list makes two things clear.

First, managing your investments after retirement is a complex planning problem that involves trading off three different types of risk (future health and need for long-term care; the risk of dying earlier or later than expected; and future investment returns) against two different goals (achieving your savings and income targets). In comparison, it is a much more difficult challenge than saving before retirement. Feeling a bit intimidated by this strikes us as a perfectly normal reaction.

Second, the way we approach this is different from some of the other studies you may have read. The simple fact of the matter is that there is no clearly superior way to approach post-retirement investing issues.

Let's briefly look at some other approaches.
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