newsprompt.coRETIREMENT INSURANCE POLICY
Just as your life has likely been nothing like your parents, your retirement probably won’t be either. It’s no longer as simple as signing up for Social Security, collecting your pension, and settling back. You will probably be more active, live and work longer, and need to rely more on what you’ve saved for income.
And that means ensuring that this income has the potential to last for your lifetime and to weather rising health care expenses, inflation, and market ups and downs.If your investment goals and time horizon have not changed, you may want to maintain your original allocations.
This means shifting some of your money from bond, equity-income and balanced funds back to growth and growth-and-income funds.Consider Rebalancing Your Portfolio.Most investors nearing retirement can’t afford to take chances with their money. It is never wise to try to recover your losses by putting even more money in risky investments, especially when that money might be needed for living expenses.
Now that you’re nearing retirement, is your portfolio too heavily concentrated in stock funds for your comfort level? If so, it may be a good time to increase the percentage of bond funds or other investments designed to provide regular income. Ask your financial professional to review your allocations. Since there is no way to know when the market has reached bottom, investing regularly can help you stay in the market without trying to time it.
One way to accomplish this is to contribute to an individual or employer-sponsored plan.In an ideal scenario, retirees would never need to touch their principal. All of their income needs would be covered by interest payments, capital gains and dividends. But what happens if someone needs more earnings on an annual basis than their portfolio can provide?
In this hypothetical situation, the retiree has income needs totaling $50,000 per year.That’s a problem. For their portfolio to fund their yearly income needs, minus the Social Security payments, they would need to withdraw money at a rate of about 7 percent per year, which means they could come up short if they happen to live a long and healthy life.”Of course there is no guarantee of the future, but it is reasonable to expect, based on historic data, that they might derive $25,000 a year in portfolio income,” says Certified Financial Planner Robert Fragasso, chairman and CEO of Fragasso Financial Advisors in Pittsburgh.
That’s assuming annual returns of 7 percent or 8 percent a year and withdrawals of no more than 5 percent.”To draw off more than 5 percent risks eating principal, and I would not advise them to do that,” he says.There is only one other solution for retirees who cannot reduce their expenses: get a part-time job.
Read on to see how three financial advisers would design a portfolio to generate income from a $500,000 portfolio. All say that at least half the portfolio should be devoted to fixed income, and one recommends a hefty 23 percent allocation to alternative strategies.
A more effective strategy: Invest your nest egg in a broad range of assets that can provide not just current income but capital growth as well. You can adopt this more effective, and more balanced, strategy for producing sustainable retirement income by taking these three steps:
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Start with a reasonable mix of stocks and bonds: Of course, what’s reasonable for many retirees say, 50% stocks-50% bonds may be too aggressive or overly conservative for others. So the key is to arrive at a blend of assets that can deliver returns high enough to provide adequate income without subjecting you to losses so large that you’ll spend down your nest egg too quickly.
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Diversify your stock and bond holdings broadly: Many retirees instinctively home in on stocks that pay above-average dividends and bonds that feature outsize yields.
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Set a sustainable withdrawal rate: The idea here is to set a withdrawal rate that’s high enough to provide an acceptable level of income, but not so high that you’ll burn through your assets early in retirement. There’s lots of debate about what that rate should be. But if you want your money to last 30 or more years, you should probably limit yourself to an initial withdrawal of 3% to 4%, and then adjust that draw annually for inflation.
Get help from a personal advisor
Spending your savings can be a lot more complicated than building them up. And withdrawing assets in the most tax-efficient way can consume time and energy you’d rather spend on other things. A personal advisor can make things easier for you.
So don’t fall into the Income Investing Trap when you’re ready to start drawing cash from your portfolio for living expenses from your portfolio. Just follow these three steps, and you’ll boost your chances of getting the income you need and lower the odds of running through your savings too soon.Market declines can be unsettling when you’re relying on what you have saved to last the rest of your life. But you still need stocks for growth potential, which is as critical in your retirement as it is when you are saving for it.
You may need those assets to last 30 years or more. History does suggest that the market is able to recover from declines that happen during a year and provide investors the potential for positive long-term returns. In fact, over the past 35 years, the market has had a positive annual return more than 80% of the time, even with an average intra-year decline of 14%.
Take charge of another area of your fiscal health: your spending. It’s important to create a budget that you can stick to now in case your income is reduced in the future. If you’re looking for ways to save money, the Federal Citizen Information Center is a good resource.
