We have $250,000 in the bank and a million to invest for debt-free retirement. We need to make $50,000 a year out of that million. Where should I invest it?
-Rob
First of all, congratulations, you have saved $1 million for your retirement – I’m sure a lot of hard work went into this! You’ve also done a great job creating a bank account that you can use in an emergency or other immediate needs. By combining these two asset bases with your debt-free balance sheet, you should be in a good position to reach your income goal of $50,000 per year.
Deciding how to invest your assets is essential before and after retirement. A Financial Advisor can help you select and manage investments for your retirement portfolio.
Before evaluating your retirement savings investment options, it’s important to first evaluate your goals. On the surface, the $50,000 annual income goal is simple, but some nuances may be relevant and worth exploring. There are a few additional considerations you should keep in mind before deciding where to invest. We will therefore review them before describing potential investment options.
Understand your goals
As with any wealth planning decision, you should always start with your goals. It seems like generate income is your primary goal. But are there other long-term goals that this million dollars should help achieve? For example, do you want to preserve the value of the capital over time and perhaps leave money to heirs? Or do you intend to spend this capital during retirement?
If we take the $50,000 annual income goal at face value, then a required return of 5% is achievable and by no means overly ambitious. You could buy a single premium immediate annuity today and earn this rate. However, if capital preservation is desired, then inflation must be factored into your calculation. Assuming positive inflation in the future, you would need a rate of return greater than 5%. Additionally, if you wish to leave an inheritance as part of your estate plan, then you will need to consider how much you wish to leave behind – this will also impact your return needs.
(If you are unclear about your financial goals, consider connecting with a financial planner and talk about it.)
Additional considerations to evaluate
There are many other factors to consider depending on your goals before making an investment decision. We’ve already touched on one – inflation – but here are some additional considerations:
The time value of money: A dollar today is worth more than a dollar tomorrow. Taking into account the time value of money, spending $50,000 per year would deplete the entire $1 million balance in just over 14 years. Does this deadline correspond to your retirement horizon?
Age and income: Similar to the point above, when do you plan to retire and how many years will you draw from your portfolio? Will you work longer and be able to further increase the value of your primary investment? Does this $50,000 cover all of your anticipated living expenses or will you have other sources of additional income, such as Social Security or employer-sponsored retirement plans to provide additional support? These questions directly influence the level of risk you are willing to take with your investments.
Long-term care: An often overlooked expense in retirement is long term care. These costs can quickly deplete the savings made in the absence of long-term care insurance. Have you taken out long-term care insurance to protect yourself against the risk of rapid depletion of your capital?
(A financial advisor can help you evaluate and plan for these and other factors. Find a Fiduciary Financial Advisor Today.)
Investment options
In the context of the potential objectives and considerations described, let’s explore some potential investment options.
As mentioned, if you simply need to generate $50,000 per year, unadjusted for inflation, and you don’t want to maintain or grow your capital, purchasing a single premium annuity is a simple solution. Another relatively safe, income-oriented option would be to build a portfolio of laddered Treasury bills or certificates of deposit (CD). However, this could introduce reinvestment risk. Since interest rates are currently close to your 5% target, there is no guarantee they will stay there in the future. You can structure an annuity or build a laddered fixed-income portfolio that matches your planned retirement horizon.
If you want the $50,000 annual withdrawal to keep up with inflation, or if you want to maintain or even increase the $1 million capital over time, then you should consider investing in a more diversified portfolio. You could build an income-oriented portfolio that includes both bonds and dividend paying stocks which can generate the desired level of annual income while protecting the value of your capital. This option might be interesting if you decide you want more flexibility with spending in retirement, for things like gifts or travel, or if you’re concerned about outliving your savings.
(And if you need help deciding how to invest your retirement portfolio, consider working with a Financial Advisor.)
Conclusion
At first glance, the question of where to invest may seem quite simple when you have an annual income goal in mind. However, when we examine the true nature of this goal, as well as some relevant considerations, the issue becomes a little more nuanced. Understanding your goals on a deeper level and the factors that might influence your success in achieving those goals will ultimately help you make the wisest and most unbiased investment decision.
Retirement Planning Tips
As you can see, planning for retirement can be complex and time-consuming. However, a Financial Advisor can help you navigate the process. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool connects you with up to three approved financial advisors that serve your area, and you can have a free introductory call with your advisor to decide which one is best for you. If you’re ready to find an advisor that can help you achieve your financial goals, start now.
It is important to maintain a emergency fund with enough money to cover between three and six months of living expenses, even in retirement. An emergency fund should be liquid – in an account that doesn’t have the risk of large fluctuations like the stock market. The tradeoff is that the value of cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.
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