When it comes to retirement planning, boilerplate advice is everywhere. Trim stocks when you stop working. Buy bonds for income. Max out your 401(k). Withdraw 4% of your nest egg each year.
But reaching your financial goals isn't just about following conventional wisdom for retirement investing and saving. Different routes can lead to a secure retirement. Using under-the-radar portfolio strategies that complement Retirement Savings 101 basics can add value.
Smart Retirement Planning Alternatives
Sure, stocks outrun inflation, but what about using stock options to generate income?
Bonds provide ballast and income, but what about buying a fixed-income annuity to create a guaranteed income stream for life?
Plowing savings into a tax-advantaged 401(k) or IRA is a no-brainer, but what about putting some retirement dollars in a taxable brokerage account?
Dialing back stocks near or in retirement may lower volatility risks, but what about the growth benefits of holding more rather than less equities in your 60s, 70s, and 80s?
Taking distributions from your 401(k) to pay bills is doable. But what about creating your own pension that provides a paycheck for life? Consider new target-date funds that come with built-in annuities.
Retirement Planning Strategies For Your Needs
There's no one-size-fits-all approach to a secure retirement.
Not outliving your money isn't just about the accumulation phase of retirement investing. It's about finding ways to solve money challenges during the "decumulation" phase. It's about figuring out how to turn the lump sum in your 401(k) into a steady paycheck. At the same time, you can grow some of your retirement savings so you don't run out of money.
Two out of three Americans say they worry more about running out of money than death, according to the 2024 Annual Retirement Study from insurer Allianz Life. And two-thirds of workers (62%) say that preparing for retirement stresses them out, according to the 2024 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI) and Greenwald Research.
Below is a less-traditional retirement savings road map — a financial GPS of sorts. The goal: to help you get safely to your retirement destination.
Read More In Our IBD 2024 Retirement Special Report. Plus, See Cures For Retirees' 5 Biggest Health Care Fears.
Investing For Retirement: Stocks Vs. Options
Options aren't usually at the top of the list when investors think about retirement planning strategies. Most 401(k) plans don't allow options trading. But the savvy use of options in an IRA (or taxable brokerage account) is a conservative way of generating income.
Not that your retirement savings should go to using options to speculate, as you don't want to gamble with your nest egg. But, rather, you could consider using a low-risk covered call strategy as part of your retirement investing plan. This common options trade is a way to collect rent, or income, on the premium you earn selling an option while also capturing upside on the stock.
Here's a quick primer on options. Calls give buyers the right to buy at a set price and time. Covered calls refer to selling calls on stocks you own. Each option contract equals 100 shares.
A covered call strategy works best when you think the stock you hold or just bought doesn't have tons of upside. Let's say you have 100 shares of Apple at $165 but you don't think shares will rise much in the short-term due to slowing iPhone sales and other headwinds. You can sell an Apple covered call that expires in a month (May 31) at a strike price of $170 (the price you agree to sell at) for $5.22.
You'll get to immediately pocket the $522 premium for selling the option (100 shares x $5.22). You get to keep that check no matter what Apple shares do before the option expires on May 31.
Good Option For Active Retirement Planning
"The retiree can use that income to supplement other forms of income in their portfolio," said Rob Williams, managing director of financial planning at Charles Schwab.
You'll also profit from any price appreciation up to the $170 stock price. The downside? You could miss out on the upside if Apple rallies above the $170 strike price by the expiration of the option. Why? You'll be forced to sell your 100 shares at $170 to the trader you sold the call to. So, if Apple shoots up to $180, you'll miss out on the $10 per share in appreciation, or $1,000.
The premium, or income, you'll earn on a covered call will be higher the closer the current stock price is to the strike price. For example, if you own Apple at $165, at a strike price of $170, you'll be able to sell the call for $5.22, which nets you $522. (That's because the trader buying the call from you is willing to pay more if he thinks Apple has more short-term upside than you think.) But if you sell the call at $175, it will be priced at $3, which trims your income to $300. (In this case, the call buyer pays less as he won't profit until the stock climbs above $175.)
But this isn't a set-it-and-forget-it retirement investing tactic, says Williams. "It takes effort." This retirement planning strategy "is most appropriate for people who own individual stocks and who have some knowledge of the options market." It can be a good income supplement, he said. "But it's important to make sure you're not cutting off the potential for growth in your portfolio."
If you've owned these 100 shares of Apple, or any other stock you sell a call on, make sure you don't have a sizable unrealized gain. If you're forced to sell the stock, you could end up paying taxes on any gains, says Williams.
Bonds Vs. Fixed-Rate Annuities In Retirement Investing
A fixed-rate annuity, a product backed by an insurer that protects against loss and offers a guaranteed rate of return and income stream, is an alternative to bonds. "It's a pretty simple product: You give the insurance company money (typically a lump sum premium), and they send you a check back every month for the rest of your life," said lifetime income expert Benny Goodman, vice president at the TIAA Institute.
Fixed annuities, experts say, shouldn't be 100% of your retirement portfolio. But they do merit their own slice in most people's asset mix pie charts. Fixed annuities should be used in concert with other guaranteed sources of retirement income, such as Social Security and traditional pensions (which are fast disappearing).
The goal: create a guaranteed paycheck big enough to cover all your essential monthly expenses, such as your mortgage or rent, HOA fees, utilities, cable TV or streaming services, insurance and health care premiums.
Most workers like the idea of turning their retirement savings into a steady paycheck. Eight of 10 (83%) workers who have a retirement plan at work said they'd be interested in using some or all of their savings to buy a product that guarantees monthly income, according to EBRI and Greenwald Research.
A good guesstimate is having a third of your retirement portfolio in fixed annuities to cover your monthly bills. If payments from Social Security or a pension cover most of your expenses, you can devote a smaller slice of your portfolio to an annuity.
"You want to make sure your expenses are met by lifetime income sources that can't go away," said Goodman. "You want to make sure you always have an apartment to live in and the lights are on."
Boost Resilience For Your Best Retirement Planning
With a fixed annuity, you don't have to worry about making withdrawals from your 401(k) when markets are in free fall and your holdings are depressed. Annuities can dampen volatility, boost your retirement investment portfolio's resilience, and protect against longevity risk.
Having guaranteed income can improve investor behavior. Some 78% of financial advisors who use DPL Financial Partners' commission-free annuity platform say it helps clients "stay the course" during periods of market volatility. And 70% said clients are "less stressed about the market."
Currently, a fixed annuity can generate more annual income than withdrawing the standard 4% from your 401(k), according to Goodman. A $1 million fixed annuity now generates $78,000 in income per year (which equates to a yield of 7.8%), nearly double the $40,000 you could get using the standard 4% rule, says Goodman. (When interest rates were zero percent, a $1 million annuity paid out closer to $60,000, or about 6%.)
"You're getting more income from the same dollars," said David Lau, founder and CEO of DPL Financial Partners. One advantage, Lau adds, is that it covers your expenses and frees up the rest of your retirement portfolio to invest in growth assets like stocks.
And while annuities are often panned for carrying high fees, the market's shift to commission-free annuities reduces costs. "You're getting a much better priced product," said Lau.
If you're worried about giving up a big chunk of cash to an insurance company to buy an annuity and not living long after, you can set up a joint annuity to ensure your spouse gets paid, albeit a smaller payout. You can also set up an annuity with a guaranteed period of 10 or 20 years that ensures your beneficiaries will get paid after you die.
Tax Deferred Vs. Taxable Accounts: Retirement Planning Flexibility
Max out your 401(k) or IRA! The tax breaks and other benefits from tax-deferred growth in a company-sponsored retirement plan or an IRA are huge.
But there are also many benefits to stashing some cash away for your golden years in a taxable account. You'll be able to access your funds without paying an IRS penalty if you take cash out before 59-1/2. You'll also have more investment choices than you will in your 401(k).
Funding a taxable account for retirement investing can help super-savers and high earners who are able to max out their tax-sheltered retirement plans save more. And if you don't have access to a workplace plan, it's a way to sock away more than the IRA contribution limit of $7,000, or $8,000 if you're 50 or older.
And given the tax-efficiency of stock ETFs and the preferential capital gains treatment of assets held for more than a year, you'll effectively be able to "simulate the tax deferral" you get in a 401(k), says Christine Benz, director of personal finance and retirement planning for Morningstar.
Passive ETFs mimic a stock index such as the S&P 500. These funds do very little trading so capital gains distributions are minimal.
"You can get away with a very minimal tax drag," said Benz.
Investing For Retirement: Not All Tax Rates Are Equal
What's more, if you're like most people, you probably pay 15% on long-term capital gains. And for most people, that's lower than the ordinary income tax rate the IRS charges for distributions from a traditional 401(k) or IRA.
Do due diligence on your 401(k) to see if it makes sense to fund other financial vehicles. But, before you fund your retirement in a taxable account, make sure you are taking advantage of your company's matching contribution. You don't want to leave money on the table when it comes to retirement planning.
If you're unhappy with your 401(k), save enough to get the match. Then fund either a traditional IRA or a Roth IRA, so you can benefit from any tax deductions from the regular IRA and the tax-free withdrawals of a Roth IRA.
Finally, fund your taxable account.
Stocks In Retirement: Maybe More Is Better
Standard retirement investing advice says trim your stock weighting to reduce portfolio risk and volatility in your golden years. But in many cases, that could lead to subpar account growth and a greater chance you'll run out of money.
A chorus of researchers say boosting your stock allocation — except for the five years before and after you retire when a market rout can inflict the most damage — is key to dealing with longevity risk.
Wade Pfau, author of "The Retirement Planning Guidebook," and Michael Kitces, head of planning strategy at Buckingham Strategic Wealth, did research that found that a "rising equity glide path" improves retirement outcomes.
The study found the way to go is holding nearly all equities in the 20 to 40 years before retirement, and then dialing back to 30% stocks in the five years before and after retirement, and then boosting the allocation back up to 60% over the next 10 years and keeping it there forever.
Retirement Investing Tactic: Gradually Add Stocks
Why? Dialing back stocks around retirement reduces the odds that your portfolio will be hurt by a sequence of returns risk, Pfau explains. "That's when you're most vulnerable to market volatility," said Pfau.
Indeed, owning a smaller helping of stocks around your retirement date means you can avoid the double whammy of having to take withdrawals when your account balance is depressed. The thinking behind gradually boosting your stock weighting in the later years of retirement back to 60%? "You become less vulnerable to volatility because you've got a shorter time horizon," said Pfau.
This larger equity weighting in retirement differs from most target-date funds, which get more conservative as savers age. It's not uncommon for target-date funds to shrink stock exposure well below 50% in the years after retirement and bottom out at just 30% stocks 30 years after retirement. "So, it's really the opposite of what all the retirement income research is suggesting you do," said Pfau.
Similarly, T. Rowe Price a few years back modestly increased stock allocations on its retirement glide paths. The mutual fund company upped stock exposure at both "the front and back end" of its glide paths. Ten years after retirement, for example, its updated glide path calls for 48% stocks, up from 40%, it announced at the time. And 30 years after retirement, its enhanced glide path calls for 30% stocks, up from 20%.
"Yeah, there's definitely a risk of being too conservative," said Tim Murray, a capital market strategist in T. Rowe Price's multiasset division. "Having more stocks gives you less chance of outliving your money."
Turn Your Target Date Fund Into A Paycheck For Life
When it comes to retirement planning, how much do you need? Too often, looking at that lump sum in your 401(k) is the be-all, end-all for many savers. But that doesn't help answer a key question. How can you turn that lump sum into a steady paycheck like the pension your grandfather lived on?
Well, there's now an easier way to do that with your retirement savings: target-date funds featuring annuities. Last month, fund-tracker Morningstar reported that since 2020 around a dozen new target-date funds that include an annuity component have either launched or have planned to launch.
And right on cue in late April, BlackRock, the world's largest money manager, went live with its LifePath Paycheck product.
It's a new spin on the target-date fund, which targets your retirement year and gets less aggressive as you age. What's different? LifePath Paycheck is a target-date fund with a built-in annuity feature. This allows you to convert a portion of your retirement savings into a paycheck for life.
More: Learn About The Best Time To Claim Social Security Plus, Save On Fees With DIY Ideas. And Read What Empower CEO Ed Murphy Says About Using AI For Retirement Planning.
Redeem Your Retirement Savings, Buy An Annuity
Here's how it works. The fund focuses on growth (e.g., stocks) early on. But at age 55 it will start to allocate dollars to a new asset class, called "lifetime income." At age 59-1/2, you will have the option to redeem a chunk of your retirement savings and buy an annuity that offers a paycheck for life from an insurer preselected by BlackRock.
By age 65, about 30% of your account balance can be used to fund the annuity. The rest of your balance can be reinvested into another retirement fund that complements your annuity, another retirement plan option, or be redeemed for cash.
"We believe LifePath Paycheck will one day be the default retirement investment strategy," said Larry Fink, chairman and CEO of BlackRock.
This type of fund is a step in the right direction for retirement planning, says Jason Kephart, director of multiasset ratings at Morningstar. "Figuring out how to help people live off their retirement savings has been kind of an elusive goal for the asset management business," said Kephart.
This type of product reduces the complexity of having to figure out how to create income from your retirement investment portfolio.
"They're bringing the annuity to you, and the asset manager is doing the due diligence on the insurer," said Kephart. "If you were to just use a regular target-date fund, and then go out and shop for and buy an annuity with a third of your retirement savings, it could be really daunting. Having the asset manager act as your fiduciary does cut out a lot of the friction. And that's a good thing."
This new product can help alleviate the fear of 60% of workplace savers that they will outlive their money, according to a BlackRock survey.
