Oliver and others argue that this whole investing for retirement thing isn’t so complicated. It comes down to the following:

  1. Save as much as you can
  1. Invest in low-cost index funds
  2. Move from stocks to bonds as you approach retirement

It’s great advice if you don’t plan on ever retiring. But if the goal is to actually live off the money you socked away during your working years, it’s much more complicated.

Investing in an index fund can’t help you figure out how much you are supposed to spend in your first year of retirement, or five years thence, or what your stock/bond allocation should be once you’ve stopped working. These are hard questions. Luckily, when you are young and saving, you likely have multiple sources of income and many years to make up for past mistakes. After you retire, there’s a lot less room for error.

You might argue that we know more money is better in retirement, so it’s enough for now to just follow the basic advice of investing in indexes—there will be time to come up with a new strategy once you reach retirement. But that’s like saying traveling from New York to San Francisco only requires heading west at some point. Those directions may get you there, but you probably won’t take the most direct route and risk getting way off track.

A better strategy focuses on income. This may include buying a fixed-life annuity, a more sophisticated bond strategy, or dividend-oriented stocks. You may even decide to not spend your savings. But each goal requires a different pre-retirement strategy.

Suppose you decide you’ll buy an annuity. How much income the annuity pays you each year depends on your asset balance  and prevailing interest rates when you retire. If you just invest in standard equity index funds and the stock market tanks the day you retire, you’ll get much less income than you planned on retiring with. 

You can hedge the risk by purchasing annuities over time or investing in bonds that protect you from annuity price risk. (Full disclosure: I consult to an advisor on post-retirement strategies that include investing in index funds to hedge different kinds of risks.) Devising these kinds of strategies may require working with an advisor or using automated advice—or perhaps one day the US government will offer more advice and nudges toward a viable, safe retirement-spending plan.

A successful retirement strategy takes good planning. Index funds are great, but investing for retirement is harder than it looks.

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