By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management AdvisorSM
Accredited Investment Fiduciary®

As people approach retirement, they often believe they are supposed to become conservative investors.   In fact, that’s exactly what using target-date funds in a 401(k) will do:  put your investment objective on auto-pilot as you approach a specified date, shifting money out of equities into fixed income options.  It’s an easy approach that probably became dogma in an earlier generation when interest rates were much higher and life expectancies were shorter.

According to the Social Security Administration, a man reaching age 65 today can expect to live to an average age of 84, and a woman turning 65 today on average, will live to 86.5.  And those are just the averages.  About one-third of those age 65 today will make it to 90 and one out of every seven 65-year-olds will live past age 95. ⁽¹⁾ Most people want their money to last as long as they do, so unless they have 20 – 30 years or so of inflation-adjusted income distributions set aside, they need their money to continue to work for them.  That’s been tough to do in bank accounts, CD’s and fixed-income investments over the past ten years, since interest rates have been at historically low levels.

The “buckets” strategy is just as relevant in retirement as it is prior to.  Visualize three buckets.  You have a short-term bucket that you’ll put cash in to use within the next two years, a mid-term bucket for money that you’ll target to use within 2 – 10 years, and a long term bucket that you will fund for needs and wants that are more than ten years out.  Your investment objective for each bucket should align with the time frame of your goals.  Stated another way, your need for growth should balance with your tolerance for risk given your time horizon.  If you believed that you needed to be conservative because you are retired and had all your money in your low-risk short-term bucket, you may be in danger of running short on money later in life due to lack of growth.

If conversely, you had all your money in your long-term bucket and were taking withdrawals, you may compound your losses during market downturns.  As you might guess, I don’t run in to too many people who are overly-aggressive in their retirement years.  Rather, the opposite is often true, as people habitually hold on to antiquated beliefs.  Remember, just because you are retired doesn’t mean you need to be conservative with all of your money.