How to Make Your Savings Work for You
Through advancements in medicine and awareness around healthy lifestyle choices our life expectancy as a country has steadily extended over the years. What this means for those nearing and/or already in retirement is that the prospect of being retired for longer is very real. This is a fantastic albeit conflicting conundrum as many increasingly grow concerned about outliving their money.
While social security and pensions, if you’re lucky enough to have one, will provide a degree of stable retirement income we will focus on the role of your savings for the purpose of this article. Ideally, your nest egg will be invested to produce an income stream that meets three objectives. First, it needs to be sufficient enough to help support what you define as a reasonable standard of living. Second, it should have the potential to grow over time in efforts to keep pace with inflation. Finally, it needs to be as dependable and consistent as possible. By focusing on the income you are able to produce off of your savings, you will be able to protect the principal from being spent down thereby extending the life of your portfolio.
Currently, we are in a low interest rate environment. This means that relatively safe investment vehicles, like bank CD’s and bonds, will do little in the way of producing an adequate income stream in your portfolio. While bonds do have a place for diversification purposes and reducing market exposure, they will lack the ability to generate income at a sufficient level given current interest rates. Furthermore, these investments offer fixed payments which eliminates the opportunity to grow your income stream.
Certain types of stocks may round out your portfolio and help to provide a higher level of income than bonds alone. Beyond offering the potential for a higher degree of income, stock dividends paid by quality companies have the potential to grow over time thereby giving their owner a “pay raise.” This is only a suggestion that selective stock ownership may provide retiree’s with the ability to protect their portfolio from the realities of low interest rates and inflation. A more thorough conversation must be had by each individual with their own financial advisors to determine the appropriate mix of investments is based on their unique situation.
Inflation is the silent threat to everyone’s retirement portfolio. We all know the cost of goods and services increases each year, sometimes by a little, sometimes by a lot. Fast forward a decade or two and these incremental increases have a major impact on the value of your money. This means that inflation will eventually impact everyone’s ability to spend unless you have made a plan to combat its erosive effects. If your portfolio is constructed to grow the income it produces over time, you at least have a fighting chance of staying ahead of the game. Ultimately, having a well thought out plan that addresses these issues and is in line with your individual risk tolerance will be the winning strategy.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC. Nicholas R. Sicina, CFP® Associate Vice President-Investment Officer, Gerrish & Sicina Wealth Management Group of Wells Fargo Advisors