Podcast transcript: Investing during retirement

The following is a transcript of this Plain Talk on Investing™ podcast episode.

Narrator: Welcome to Vanguard's Plain Talk on Investing, an ongoing series that provides easy-to-follow steps aimed at helping you achieve financial success.

If you've made it to retirement, you probably know the importance of investing. In this podcast, John Ameriks, head of Vanguard's Investment Counseling and Research group, talks about concerns you may have and offers some tips on how to invest wisely in retirement.

First, as John reminds us, your portfolio's asset allocation is just as important during your retirement years as it was during the years you built your nest egg.

John Ameriks: The asset allocation of a retiree's portfolio is a critically important factor in their investments. Studies have shown that roughly 80% to 90% of the total return of the portfolio through time is going to be explained by the asset allocation—so it's a critically important factor in controlling risk and generating the appropriate return through time.

Narrator: Some retirees may think they can just shift their entire portfolio to relatively safer investments—such as bond funds and money market funds. But John explains why it's important to maintain balance in your portfolio, even in retirement.

John Ameriks: As with anything else, you can overdo it. Money market accounts, fixed income accounts, do have a role in a portfolio—and that role is usually to moderate risk and provide an income stream. And those types of investments can be very useful at doing that. On the other hand, there's a very clear trade-off. There is lower risk in those investments, and hence, lower expected returns through time.

So, Vanguard's general recommendation is for all investors to consider the overall balance of their portfolio across asset classes. Some portion of the portfolio should be invested in stocks, in order to obtain some exposure to that expected growth, and long-term, higher expected returns. It comes with a little bit of risk, but I guess I would say that, in retirement, the objective for most retirees is to control risk, not necessarily eliminate it.

Narrator: If you're not sure you have the right asset allocation for your current needs, visit Vanguard.com and search for our "Investor Questionnaire." Our questionnaire will help you determine an appropriate investment mix based on your risk tolerance and retirement timeframe.

Your reaction to market volatility could be another signal you need to revise your asset allocation. The ups and downs of the market can be hard to ride out when you're saving for retirement, but, when you're spending money from your portfolio, market swings can be downright scary. John says it's important to know what kind of investor you are, and plan for possible volatility.

John Ameriks: I think, in general, most retirees do prefer to have a portfolio that's less aggressive than somebody who's in their prime earning years. So they do want to ratchet back a little bit on the level of risk. But, moderation is important, still. A lot of people will still have a significant exposure to equities. So, I think, "know yourself" is the best advice when it comes to tricks of the trade in terms of learning how to ride out the market.

You know, one of the other things you can do is think about how you will adjust to the market volatility through time. Make sure that you have the flexibility to do that. If you're going to be an aggressive investor in retirement, recognize that if there's a down period in the markets, you may need to ratchet back a little bit in terms of what you're spending.

Narrator: Even if you're not an aggressive investor in retirement, it's a good idea to monitor your portfolio from time to time, as John explains.

John Ameriks: I think it's very careful to pay attention to the asset balances in your portfolio. That said, it's not something that people need to keep an eye on every day. Quarterly is probably more than enough. Semiannually seems to really be the frequency at which I think most retirees are, in practice, comfortable with looking at their investments. Take a look at the portfolio, make sure that it's within the bounds of the overall asset allocation that you set for yourself. It's really not something that people need to do every day.

Narrator: And, of course, you can't forget about investment costs once you're retired. These fees can have a big impact on your portfolio.

John Ameriks: When you're in retirement and thinking about spending something on the order of 4% or 5% of the portfolio, if you're being charged an additional 1% or more in terms of investment management fees, you're giving up a very large chunk of your overall income. So, you really do need to keep an eye on that as well.

Narrator: Making sure you have enough income in retirement is a big concern for most retirees. To help you generate income in retirement, there's a new category of mutual funds called Payout Funds or Income Replacement Funds. Vanguard's funds are called Managed Payout Funds.* John describes why these funds can be an easy option for retirees.

John Ameriks: One of the easiest ways is to make use of the new Managed Payout Funds that Vanguard offers. They provide an all-in-one investment vehicle and distribution mechanism for someone that's looking for a portfolio and a draw-down strategy in a single package.

Narrator: While these funds are designed to deliver monthly payments without exhausting your assets, they are not guaranteed to achieve their investment objectives, are subject to loss, and some of their distributions may be treated in part as a return of capital.

If the Managed Payout Funds aren't right for you, there's a simple way to use the funds you already own to generate income in retirement.

John Ameriks: One of the easiest things to do is to set up a spending account—either a money market account or some type of a bank account—and direct the dividend flow and distribution flow from their mutual fund investments into that account. And use that as a source for managing their spending through time.

Narrator: How you'll manage your income in retirement is a personal decision, but John feels that most retirees can use a blend of several investment options.

John Ameriks: Some combination of both guaranteed and nonguaranteed sources is, I think, what most retirees are going to be most comfortable with. If they need to elevate their guaranteed floor, they can do that with some portion of the portfolio used to purchase an income annuity. They can use the remainder of the portfolio to pursue a strategy, such as the Managed Payout Funds or a balanced account with a systematic withdrawal plan, or some even more tailored gradual draw-down of the assets they have.

Narrator: Finally, you can always get help. Financial companies offer many resources for retirees, including financial planning and asset management services. John talks about a convenient, but sometimes overlooked, service that can help you manage distributions from your retirement accounts.

John Ameriks: I think one of the most important services that retirees can avail themselves of is the required minimum distribution service that Vanguard offers. That can really simplify life for people who have reached the age of 70½ and are required to begin taking distributions from their IRAs or 401(k)s. It really does sort of automate the process of having to take those distributions. And, what we're finding is more and more retirees are facing the need to get that done. So we can absolutely help with that piece.

Narrator: We hope this Plain Talk on Investing podcast has given you ideas to help manage your retirement savings. You'll find more tools and guidance in the Planning and Education area on Vanguard.com. Check back with us for more practical suggestions on helping to secure your financial future.

Thanks for listening.

*Patent pending.

Mutual funds, like all investments, are subject to risks. Investments in bond funds are subject to interest rate, credit, and inflation risk.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

If you take withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.

The Managed Payout Funds are not guaranteed to achieve their investment objectives, are subject to loss, and some of their distributions may be treated in part as a return of capital. The dollar amount of a fund's monthly cash distributions could go up or down substantially from one year to the next and over time. It is also possible for a fund to suffer substantial investment losses and simultaneously experience additional asset reductions as a result of its distributions to shareholders under its managed distribution policy. An investment in a fund could lose money over short, intermediate, or even long periods of time because each fund allocates its assets worldwide across different asset classes and investments with specific risk and return characteristics. Diversification does not necessarily ensure a profit or protect against a loss in a declining market. The funds are proportionately subject to the risks associated with their underlying funds, which may invest in stocks (including stocks issued by REITs), bonds, cash, inflation-linked investments, commodity-linked investments, long/short market-neutral investments, and leveraged absolute-return investments.

The asset allocation studies mentioned were conducted by Vanguard.

Visit Vanguard.com to obtain a fund prospectus, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing.

You may access and download this podcast only for your personal and noncommercial use. You may not use it in any other manner or for any other purpose without Vanguard's written permission.

Copyright 2008, The Vanguard Group, Incorporated. All rights reserved. Vanguard Marketing Corporation, Distributor.


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