Retirement Readiness: How to Invest

Most people want to maintain their current standard of living after they retire. That's why they are saving and investing to support their future spending. But rather than focusing on how much wealth to accumulate, you should think about how much retirement income your portfolio can support. This can lead to better retirement planning and change how you invest. An income focused approach also helps you manage the risks that can affect retirement income, like interest rates, inflation, and stock market downturns. Let's assume you are about to retire and have saved $500000. How much income this provides depends a lot on interest rates and inflation. For example, if interest rates are 5% and inflation is 2%, your 500000 translates into about $28000 of retirement income per year over 25 years. But if interest rates fall to 4%, you can only afford about $25000 in income per year. And if inflation rises to 3%, your retirement income would be even less, a 19% drop altogether. So how can an income focused solution address these risks? Here's how. In your early working years, you invest mostly in a diversified mix of global stocks and bonds. These are designed to grow retirement wealth, which you can draw income from later. As you get closer to retirement, your focus shifts from income growth to income risk management. As you reduce exposure to equities and invest more in bonds and inflation protected securities. These investments are designed to reduce the impact of inflation, interest rate movements or a market downturn on expected retirement income. Dimensional believes this investment approach helps you reduce the uncertainty around future retirement income. Resulting in more effective planning and a greater chance of maintaining your standard of living after you retire.