We have $250,000 in the bank and a million to invest for a debt-free retirement. Of that million, we have to earn $50,000 a year. Where should I invest it?
-To rob
First, congratulations on saving $1 million for retirement. I’m sure a lot of hard work went into this! You’ve also done a great job of building a bank account that you can use for emergencies or other immediate needs. When you combine these two asset bases with your debt-free balance sheet, you should be in a strong position to reach your income goal of $50,000 per year.
Deciding how to invest your assets is crucial, both before and after retirement. A financial advisor can help you select and manage investments for your retirement portfolio.
Before you evaluate your retirement savings investment options, it’s important to start by assessing your goals. On the surface, the $50,000 per year income goal is simple, but some nuances can be relevant and worth exploring. There are a number of additional considerations to keep in mind before deciding where to invest, so we’ll dive into them a bit more before outlining your potential investment options.
Understanding your goals
As with any estate planning decision, you should always start with your goals. It seems like generating revenue is your main goal. But are there other long-term goals that this $1 million should help achieve? For example, do you want to retain the value of the principal sum over time and perhaps leave money to heirs? Or do you plan to spend this principal during your retirement?
If we take the $50,000 annual income goal at face value, a required return of 5% is achievable and certainly not overly ambitious. You can buy a single premium immediate annuity today and earn this rate. However, if preservation of principal is desired, inflation must be taken into account in your calculation. Assuming positive inflation in the future, you would need a higher return than 5%. Additionally, if you want to leave a legacy as part of your estate plan, you’ll need to think about how much you want to leave. This also affects your return needs.
(If you’re not sure what your financial goals are, consider contacting a financial planner and talking to him or her about them.)
Additional considerations to evaluate
There are many more factors to consider in conjunction with your goals before making an investment decision. We’ve already mentioned one – inflation – but here are some additional considerations:
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Time value of money: A dollar today is worth more than a dollar in the future. 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 time frame correspond with your retirement horizon?
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Age and income: Similar to the point above, when do you expect to retire and how many years will you be drawing on your portfolio? Do you work longer and can you further grow the value of your main investment? Will this $50,000 cover all of your expected living expenses or will you have other additional sources of income such as Social Security or employer-sponsored retirement plans to provide additional support? These questions directly influence how much risk you can take with your investments.
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Long-term care: An often overlooked expense in retirement is long-term care. This expense can quickly wipe out savings without long-term care insurance. Do you have long-term care insurance to protect you from the risk of your capital being depleted quickly?
(A financial advisor can help you evaluate and plan for these factors, among other things. Find a fiduciary financial advisor today.)
Investment options
In the context of the potential goals and considerations outlined, let’s explore some potential investment options.
As mentioned, if you simply need to generate $50,000 per year, not adjusted for inflation, and don’t want to maintain or grow your principal, purchasing a single-premium annuity is a simple solution. Another relatively safe, income-oriented option would be to build a portfolio of laddered government bonds or certificates of deposit (CDs). However, this may entail a reinvestment risk. Since interest rates are currently close to your target of 5%, there is no guarantee that they will remain at the same level in the future. You can structure an annuity or build a graduated fixed-income portfolio that matches your expected retirement horizon.
If you want the $50,000 annual withdrawal to keep pace with inflation, or if you want to maintain or even grow the $1 million principal over time, you may want to consider investing in a more diversified portfolio. You could create an income-oriented portfolio consisting of both bonds and dividend-paying stocks that can generate the annual income you want while protecting the value of your principal. This option may be attractive if you decide you want more flexibility on things like gifts or travel in retirement, or if you’re concerned about the potential of outliving your savings.
(And if you need help deciding how to invest your retirement portfolio, consider working with a financial advisor.)
In short
At first glance, the question of where to invest seems quite simple if you have an annual income goal in mind. However, when you unpack the true nature of this goal and some relevant considerations, the question becomes a bit more nuanced. Understanding your goals on a deeper level and the factors that can influence successfully achieving these goals can ultimately help you make the soundest and most unbiased investment decision.
Retirement planning tips
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As you can see, planning for retirement can be complex and overwhelming. However, a financial advisor can help you navigate the process. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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It’s important to maintain an emergency fund with enough money to cover three to six months of living expenses, even in retirement. An emergency fund should be liquid – in an account that isn’t at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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The post Ask an Advisor: We have $1.25 million in retirement savings and need to withdraw $50,000 per year. How should we invest it? first appeared on SmartReads by SmartAsset.
