Investment Strategy Changes After Retirement

Mutual-fund companies and other investment firms have done a great job convincing Americans of the need to sock away money for retirement. But they typically don’t provide as much guidance for those people who already have retired.

In several ways, financial priorities change after people stop working. That means investing tips and approaches that might make sense for younger individuals wouldn’t work so well for retirees. Consider how strategies might vary for retirees in the following topic areas:

* Retirement plans. It’s a good idea for younger people to scrape up as much cash as they can for deposit into tax-sheltered retirement plans. But for seniors, it’s often more important to concentrate on pulling the money out wisely.

For example, a stiff tax penalty awaits those seniors who fail to withdraw enough cash each year from individual retirement accounts once they reach their early 70s. A penalty also applies to large IRA withdrawals--generally those in excess of $150,000 a year. And seniors over 70 1/2 generally can’t even make IRA contributions, assuming they have earned income in the first place.

* Dollar-cost averaging. The idea of socking away modest sums of cash on a regular basis is a great way for people of any age to build up wealth and deal with market volatility, and it can make sense for many retirees. Mutual funds are fine vehicles for this because they allow small monthly purchases of $50 or $100 or so.

But it’s also important for senior citizens to consider systematic-withdrawal programs, which offer dollar-cost averaging in reverse.

“As with dollar-cost averaging, the real advantage [of a systematic-withdrawal plan] is that it instills discipline and provides a budget with which to work,” says Douglas Loudon, investment director of the AARP Funds from Scudder in New York.

Mutual-fund companies routinely offer systematic-withdrawal programs, even if they don’t publicize them as much as automatic-investment plans.

* Estate planning. Bequeathing their wealth is probably the last thing on the minds of younger investors trying to build up a nest egg. But that is a concern for many older investors. Seniors who want to compile a handsome sum for heirs might have to take more risks to build it up. That usually means incorporating stock funds into their plans--and giving these riskier investments sufficient time to grow.

“If you want to pass an estate to a spouse or heirs, that has to be decided upfront,” says Stephen Scott, chief investment officer for Sierra Trust Funds in Los Angeles.

* Growth investments. There is truth to the notion that senior citizens should probably play it more conservatively than younger people by favoring bond- and money-market funds over stock portfolios.

But an individual’s time horizon is more critical than age in determining an appropriate investment mix. For example, a 30-year-old investor who plans to buy a house next year might need to assume less risk than a healthy 65-year-old who can anticipate living another 20 years.

“It’s generally known that people don’t put enough money into [stock-market investments] over age 65,” Loudon says.

Life-cycle mutual funds offer several guidelines. For example, the Vanguard LifeStrategy Conservative Growth Portfolio ([800] 662-7447), which targets investors ages 60 to 75, holds about 40% of its assets in stocks. Even Vanguard’s LifeStrategy Income Portfolio, designed for people 75 and up, has a normal 23% stake in stocks.

The Stagecoach Lifepath 2000 Fund, designed for people planning to retire or start withdrawing money for other purposes in 2000, has about 23% of its assets in stocks.

But that jumps to about 50% for Lifepath 2010, which is appropriate for people with an eye on starting retirement 14 years from now. The Stagecoach funds ([800] 222-8222) are managed by Wells Fargo Bank of San Francisco.

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One thing to note about retirement planning is that you don’t need to move all of your assets from growth to stable investments on the first day you stop working.

“Retirement shouldn’t be thought of as a specific date but as a new phase in life,” says Pat Castle, a retirement specialist for Charles Schwab & Co. in Phoenix.

He suggests younger retirees earmark anywhere from 40% to 60% of their portfolio in growth investments, preferably stock funds, to help stay ahead of inflation.