Investing Your Social Security Check? Consider These Factors
Rob Silverblatt

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For many seniors, monthly Social Security checks are a safety net used to cover immediate costs. But for those who have the luxury of being able to grow their portfolios, these payments can represent a regular source of investable income. "On the assumption that they don't need the money now, odds are good that they won't need the money for a while. And that argues that they can invest the money with the long term in mind," says Ric Edelman, a Virginia-based financial advisor and best-selling author.

Social security checks are worth an average of $1,164 per month for a retired worker and $1,892 per month for retired couples. For seniors looking to invest all -- or even a portion -- of that income, here are some things to consider.

Dollar-Cost Averaging

Many experts argue that investors, regardless of their age, should adopt dollar-cost averaging. This practice, which involves investing fixed amounts of money at regular intervals, is meant to reduce portfolio risk. For instance, an investor who deploys $1,000 per month into the market regardless of how stocks and bonds have been performing doesn't run the risk of going all in right before prices peak and turn. For advocates of this strategy, Social Security checks are essentially pre-packaged, dollar-cost averaging tools. "The best approach is to invest as soon as they get the check," says Edelman. "History tells us that when you invest at regular intervals ... you will smooth out the volatility of the financial markets."

Still, for seniors who like exchange-traded funds, dollar-cost averaging can present problems. ETFs have been growing in popularity lately, largely because they boast lower management fees than traditional mutual funds. But with limited exceptions, investors pay a commission each time they put money into ETFs. Particularly with small monthly investments, these commissions can quickly erase whatever cost advantages ETFs glean from their low management fees. Mutual funds, on the other hand, are more amenable to regular investments of small amounts of money. Seniors who insist on ETFs can save the money from their checks and invest larger sums at less-regular intervals.

Investment Risk.

One of the more important investing rules is to develop time horizons. This involves investors asking themselves when they will need access to the money in their portfolios; Those with longer time horizons can afford to leave their money invested for several years. The general rule is the longer the time horizon, the more risks an investor can take.

A common assumption is that most seniors have short horizons and therefore should only have limited exposure to stocks. But that's not always the case. "It's funny that most people think that when you hit retirement, you don't have a long term," says Edelman. "[But] even those in their 60s and 70s have 10, 20, 30 years to go, so they can invest with a long-term perspective."

Jeff Tjornehoj, Lipper's research manager for the United States and Canada, says that most seniors should have at least some exposure to stocks. Still, there are a number of variables. "There's not a good rule of thumb out there," he says. "Standard practice for a long time, or at least the lazy view, was 110 minus your age and that's your equity allocation. But that doesn't [say anything about] what kind of equity."

Overall, though, portfolios should become more conservative with age. Balanced funds, which offer exposure to both stocks and bonds, are a popular compromise. Still, some suggest that for seniors who choose to continue investing, bond funds are the best option. "If I were looking for something with income attached to it, I think that would be [better] than anything else," says Peter Starr, a North Carolina-based financial advisor.

What are your investment goals?

Many seniors, particularly those who are financially stable, are investing for the benefit of others. Common examples include helping grandchildren pay for college and setting up investments that family members will eventually inherit. Edelman says in those cases, it could make sense for seniors to lengthen their time horizons for those parts of their portfolios. "While it might sense for an 85-year-old to have most of their money in government bonds, you wouldn't suggest that for a 30-year-old grandchild," he says. "And if the grandchild is ultimately going to get the money, then perhaps you should be investing with that grandchild in mind."

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