The best retirement investing strategies

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Kathy Kristof

The cover-the-basics approach to retirement investing aims to match your fixed expenses with fixed sources of income, such as Social Security, pensions and immediate annuities. You can then invest the rest of your assets to provide income for non-necessities, such as travel and entertainment.

Let’s say a couple needs $6,000 a month to meet day-to-day expenses and receives $4,000 a month from Social Security at 66, the age that Uncle Sam considers full retirement age for people born between 1943 and 1954. Their gap is $2,000 a month.

Rather than accumulating a cash hoard to cover such a gap between income and costs, said retirement expert Steve Vernon, retirees should use an immediate annuity to cover that portion of the gap that’s for non-discretionary expenses.

The type of immediate annuity Vernon recommends works much like a pension. You invest a lump sum with an insurance company, and the insurer pays the money back to you, with interest, guaranteeing that the monthly payments will last as long as you do. This approach allows you to cover all of your fixed expenses and take more risk with your remaining assets.

Social Security as an annuity

Unfortunately, lifetime annuities are not especially attractive nowadays. A $100,000 investment in a joint-life immediate annuity will return $475 per month to a 66-year-old couple who want payments to last for both of their lifetimes, according to If they wanted the annuity payments to adjust for inflation, the monthly payments in the early years would be lower or the up-front cost would be higher.

One way to avoid locking in too much money at low rates might be to buy an immediate annuity now with a portion of your savings and invest more in annuities every few years, assuming rates ratchet higher.

If our hypothetical couple have pensions and other savings that will cover their $6,000 in monthly expenses for four years after they retire, they could delay claiming Social Security, which offers one of the best annuity deals around. After you reach full retirement age, Social Security hikes monthly payouts by 8 percent for each year you hold off on claiming benefits up to age 70.

Assuming that Social Security would pay each spouse $2,000 a month at age 66, the monthly benefit for each would be $2,751 at age 70 if they didn’t claim payments until that age.

In return for making an “investment” of a little more than $192,000 — the $4,000 in delayed monthly benefits multiplied by 48 months, plus cost-of-living adjustments to those payments — they would receive enough added benefits to cover almost all of the gap between income and expenses for the rest of their lives.

Finding the right investment mix

Once you’ve applied an asset-allocation approach to your retirement nest egg — that is, you’ve matched your fixed expenses with fixed sources of income — you may be able to devote a hefty portion of the rest of your savings to stocks. That’s partly because you’re insulated against short-term stock market downturns. And when you have time to wait out declines, you can tolerate more stock market volatility.

The right mix depends on your age, said Catherine Gordon, a strategist at Vanguard Group. At age 66, Gordon said, you can safely invest half of your assets in stocks and the rest in bonds and cash.

The stock portion of the portfolio should be divided between domestic and foreign stocks. The bond allocation should include foreign and U.S. debt and be spread among different maturities, though it shouldn’t go overboard on long-term bonds.

A look at Vanguard’s target-date retirement funds — all-in-one funds that become more conservative as you approach the target date — gives you a good idea of the fund giant’s ideal allocations. Vanguard Target Retirement 2015 (symbol VTXVX), which is designed for an investor on the cusp of retirement, had 51 percent of its portfolio in stocks and 45 percent in bonds at last report. Vanguard Target Retirement 2010 (VTENX), which is for investors who are five years into retirement, has 37 percent of its assets in stocks and the rest in bonds and cash.

Add more risk?

But some advisers advocate a more-aggressive tack. Nick Ventura, a money manager in Ewing, N.J., suggests that in today’s low-interest-rate environment you should put special emphasis on dividend-paying stocks, including real estate investment trusts. He also thinks investors should keep some money in commodity funds to protect against inflation.

Retirement expert Steve Vernon has a simpler approach. Because he assumes that retirees have covered 100 percent of their fixed expenses through Social Security, annuities and pensions, he suggests you invest the rest of your money in a traditional balanced fund, which typically has about two-thirds of its assets in stocks and the rest in bonds.

Solid choices include Dodge and Cox Balanced (symbol DODBX), FPA Crescent (FPACX) and Vanguard Wellington (VWELX). Crescent, a member of the Kiplinger 25, recently held a modest 48 percent of its assets in stocks.

There’s no perfect formula, said Anthony Webb, senior economist at the Center for Retirement Research at Boston College. Ultimately, you have to figure out how much risk you can tolerate and then create a mix of stocks, bonds and cash that feels comfortable. “You may not be totally right,” said Webb, “but you also will never be totally wrong.”

Kathy Kristof is a contributing editor to Kiplinger’s Personal Finance magazine. Send your questions and comments to money And for more on this and similar money topics, visit

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