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Investment management is a complex business, sometimes unnecessarily so. Like any sector of the economy, it has entrenched interests who gain from keeping the mystique level high and barriers to entry intact.
The first step for retirees, then, is to understand the players and their motivations. After all, it's your money. Placing it in the trust of others is not a bad call, but it could be an expensive one — if made badly by you.
Who are investment managers? There are layers upon layers, so here's a cheat sheet for retirees trying to navigate what for many is a new world:
1. Your old 401k plan
Once you leave the workplace there is a certain amount of inertia in play. You might have so many choices that leaving your money in your 401k can seem prudent.
The upside: You can leave your investments as they are, which might be working just fine, or easily convert them into a retirement-oriented strategy.
The risks: Most small-company 401k plans are extraordinarily expensive. Rolling over to a self-directed IRA can save you a bundle in fees while expanding your investment options.
2. An annuity or other insurance product
When you finally clock out for good, expect your mailbox to overflow with offers to turn your retirement nest egg into a monthly income, usually in the form of an annuity product. Here, you pay an insurance company to invest on your behalf. They take on the risk while providing a fixed lifetime income to you.
The upside: It's set-it-and-forget-it investing and in some cases can be the right choice, especially for retirees who fear outliving their savings.
The risks: Insurance contracts are complex and the investment management fees are high. It's very hard, but not impossible, to find clients of annuity firms who will say that they are happy with their decision. Tread carefully here, and make sure that whoever is giving you advice is acting on your behalf, not solely to earn a commission.
3. Become a do-it-yourselfer
Self-directed IRAs can be a boon for folks confident that they can manage the ups and downs of investing and achieve the goals they set. Most of the big brokerages have worked hard to drive down costs, competing to draw in the maximum of these pools of money.
The upside: If you did a good job overseeing your investments during your working years, there's no reason to assume that retirement investing will be dramatically different.
The risks: Your emotions can be a problem when the stakes are higher. Running out of money in old age or losing the bulk of your lifetime savings in a market panic is a serious thing.
In the end, a good balance for investment management in retirement is a matter of your core values: Finding an adviser you trust, owning investments you understand and working toward a concrete, achievable goal. You can do it — if you fully understand the pitfalls along the way.