Putnam Investments: Making your nest egg last
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Strategies for sustainable income in retirement
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Putnam Investments: Making your nest egg last
- 1. Not FDIC May Lose No Bank Insured Not FDIC Value May Lose Guarantee No Bank Insured Value Guarantee EO002 273312 2/12 |1
- 2. Topics for today • 5 key challenges to prepare for in retirement • Achieving a successful retirement • Putting an income plan into practice EO002 273312 2/12 |2
- 3. Five challenges we can prepare for • Longevity • Inflation • Health-care costs • Public policy changes • Investment risks and volatility EO002 273312 2/12 |3
- 4. Longevity: Plan on spending 25 to 30 years in retirement Your lifespan probability after reaching age 65 Living to age 83 Living to age 89 Probability: 56% Probability: 31% Living to age 94 Probability: 14% 65 70 75 80 85 90 95 100+ Age Source: National Center for Health Statistics, U.S. Life Tables, 2005. Most recent data available. EO002 273312 2/12 |4
- 5. Even low levels of inflation make a difference over time Amount needed to maintain purchasing power: • 30 years $287,174 • $50,000 income $162,169 $90,568 2% 4% 6% Inflation rate EO002 273312 2/12 |5
- 6. Health-care costs outpacing inflation and earnings • A couple age 65 retiring in 2011 needs $230,000 in savings to fund healthcare needs in retirement Health insurance premiums – Fidelity Consulting Services, 2011 160% Workers’ earnings 50% Overall inflation 38% 10 08 01 9 06 11 04 09 02 03 00 05 07 9 20 20 20 19 20 20 20 20 20 20 20 20 20 Source: Kaiser Family Foundation, April 2011. EO002 273312 2/12 |6
- 7. What about Social Security? 1950 Today Today 2032 2036 $ $ $0 There were 16 3 workers for Benefits owed 2 workers The Social U.S. workers each currently contributing Security for each beneficiary exceed taxes for each trust fund Social collected beneficiary will be Security exhausted beneficiary Sources: Social Security Administration 2011 Annual Report. EO002 273312 2/12 |7
- 8. Where are income tax rates headed? U.S. federal income tax rates, 1962–2012 (%) (%) 100 Kennedy tax cuts Tax Reform 80 Act of ’86 60 Bush/Clinton Tax rate Bush tax hikes tax cuts 40 Bush 20 tax cuts extended 0 1962 2012 This chart reflects the maximum federal income tax rate at each year-end. Source: Internal Revenue Service, 2012. EO002 273312 2/12 |8
- 9. Achieving a successful retirement • Diversify to manage volatility and achieve growth • Make sure you’re not withdrawing too much • Consider adding guaranteed income • Be smart about taxes • Address other potential risks EO002 273312 2/12 |9
- 10. Choose the right withdrawal rate How long would your money have lasted? Cash 10% 50 Bonds Stocks 30% 60% 40 30 Years 20 10 3% 4% 5% 6% 7% 8% 9% 10% will last will last will last will last will last will last will last will last 50 years 37 years 22 years 17 years 14 years 12 years 11years 10 years 0 Percentage of your portfolio’s original balance withdrawn each year This example assumes a 90% probability rate. These hypothetical illustrations are based on rolling historical time period analysis and do not account for the effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical rolling periods from 1926 to 2011 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (as represented by U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index. EO002 273312 2/12 | 10
- 11. Address longevity risk Historical success of three asset mixes (assumes 5% withdrawal rate, adjusted for inflation annually) Mix 20 years 30 years 40 years 20% Stocks Conservative 50% Bonds 89% 26% 3% 30% Cash 60% Stocks Balanced 30% Bonds 96% 75% 55% 10% Cash 80% Stocks Growth 20% Bonds 96% 79% 70% 0% Cash 0–59% probability 60%–79% probability 80%–100% probability These illustrations are based on a rolling historical time period analysis and do not account for the effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical returns from 1926 to 2011 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index. EO002 273312 2/12 | 11
- 12. When you retire can make a big difference Sequence of returns risk refers to adverse effect negative investment returns in the early stages of retirement can have on a nest egg • Assumptions – $1 million nest egg – 5% withdrawn annually and increased each year to keep up with inflation – Invested in a portfolio of 60% stocks, 30% bonds, and 10% cash – Results over a 10 year timeframe $1,731,989 $1,861,592 $1M $472,238 Retire in 1980 Retire in 1990 Retire in 2000 EO002 273312 2/12 | 12
- 13. Consider diversifying more broadly in retirement U.S. large-cap U.S. high-yield Floating rate bank U.S. Treasury bills Hedge funds stocks bonds loans Developed country Global investment Real estate U.S. investment Commodities international grade bonds investment trusts grade bonds stocks Inflation- U.S. small-cap Emerging-market U.S. growth and Emerging-market protected stocks stocks value stocks bonds securities Traditional asset classes are defined as those included in traditional balanced portfolios, such as stocks, bonds, and cash, and that have been widely owned by individual investors since the post-war emergence of modern portfolio theory. See “The History of Absolute Return Investing” Modern asset classes are specialized investments that were created or have become more accessible since the advent of broader market participation by individual investors due to tax-advantaged retirement saving EO002 273312 2/12 | 13
- 14. Consider adding guaranteed income Probability of portfolio Example survival over 30 years • Balanced portfolio – 50% 94% stocks, 40% bonds, 10% cash 68% • 5% withdrawn annually • Guaranteed income based on current immediate No guaranteed 25% annuity rates income guaranteed income This example is based on rolling historical time period analysis and does not account for the effect of taxes, nor does it represent the performance of any Putnam fund or product, which will fluctuate. Assumes historical rolling periods from 1926 to 2011 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (as represented by U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Guaranteed income is based on a single premium, immediate annuity for a 65-year-old male assuming single life expectancy. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index. EO002 273312 2/12 | 14
- 15. Pay attention to taxes Type of income Taxability Social Security May be partially taxable as ordinary income Pension income Taxed as ordinary income IRA and 401(k) distributions Ordinary income rates Dividend income 15% rate Long-term capital gains 15% rate Roth IRAs Not subject to taxation Liquidation of investment principal Not subject to taxation EO002 273312 2/12 | 15
- 16. Use a Roth strategy to control your tax bill • Source of tax-free income in retirement – Access to tax-free source of income provides more options on where to draw income from • No mandatory withdrawals at age 70½ • Having a portion of retirement savings in a Roth IRA can provide a hedge against the threat of rising taxes in retirement EO002 273312 2/12 | 16
- 17. Preserve your wealth in retirement through tax efficient withdrawals Retirement situation Proposed course of action Lower marginal tax rate Draw from traditional retirement accounts to maximize use of lower relative tax bracket, which may help to reduce RMDs at age 70½ Higher marginal tax rate Use tax-free or taxable assets to avoid higher income tax rates and potentially take advantage of lower capital gains rates Significant appreciation If leaving an inheritance, preserve taxable assets to in a taxable account take advantage of “stepped-up” cost basis at death Working in retirement Avoid traditional retirement accounts, which will increase overall income (higher income could trigger taxes on Social Security benefits) EO002 273312 2/12 | 17
- 18. Address other specific risks Post-retirement risk Risk management tool Unexpected Medigap supplemental coverage or health-care costs health-care “emergency fund” Loss of ability to live Long-term-care insurance or independently health-care “emergency fund” Catastrophic medical or Life or long-term-care insurance long-term-care costs Lawsuits or creditors Trusts Spending the children’s Life insurance/irrevocable life inheritance insurance trust Inability to fulfill Charitable remainder trust or charitable intent charitable annuity EO002 273312 2/12 | 18
- 19. Putting an income plan into practice • Expense approach: Matching income sources with expenses • Time-frame approach: Considering a bucket strategy EO002 273312 2/12 | 19
- 20. Match potential sources of income to expenses in retirement Essential expenses • Annuities • Social Security • Dividends • Pension income • Interest • Required minimum distributions Discretionary • Employment income expenses • Portfolio withdrawals • Personal savings Unforeseen • Real estate expenses • Life insurance • Long-term-care insurance EO002 273312 2/12 | 20
- 21. Consider a bucket approach Short-term income Mid-term income Long-term income (0–2 years) (2–10 years) (10+ years) Mix of growth and income, Meet immediate cash-flow Inflation hedge, address replenish short-term bucket, needs, emergency fund, etc. longevity risk guard against market volatility • Cash • Bonds • Growth stocks/funds • CDs/money market • Deferred annuities • Real estate • Short-term bonds • Absolute return funds • Commodities • Immediate annuities • Asset allocation funds, • Longevity insurance • Social Security/pension income balanced funds • Wages EO002 273312 2/12 | 21
- 22. Closing thoughts • The retirement landscape will continue to evolve • It’s critical for investors to prepare for certain (and uncertain!) risks • A thoughtful income strategy can help you address these challenges and attain the lifestyle in retirement you desire • Meet with your financial advisor to assess your personal situation EO002 273312 2/12 | 22
- 23. Additional resources Books On the web • Longevity Revolution: As Boomers • AARP, www.aarp.org Become Elders, Theodore Roszak • Social Security Administration, • AgeQuake, Paul Wallace www.ssa.gov • Age Power: How the 21st Century • American Savings Education Will Be Ruled by the New Old, Council, www.asec.org Ken Dychtwald, Ph.D. • ElderWeb, www.elderweb.com • We're Not in Kansas Anymore: • Medicare, www.medicare.gov Strategies for Retiring Rich in a • National Association of Home Totally Changed World, Care Providers, www.nahc.org Walter Updegrave • How Not to Die Broke at 102, Adriane Berg EO002 273312 2/12 | 23
- 24. A BALANCED APPROACH A WORLD OF INVESTING A COMMITMENT TO EXCELLENCE EO002 273312 2/12 268076 7/11 | 24
- 25. Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing. Putnam Retail Management putnam.com EO002 273312 2/12 | 25
- 26. Not FDIC May Lose No Bank Insured Value Guarantee EO002 273312 2/12 | 26
Notes de l'éditeur
- Welcome and thanks for coming. My name is _____________ and I am a financial consultant with ______________. The presentation I am going to take you through is called “Making your nest egg last: Strategies for sustainable income in retirement.” Historically, we in the financial services industry have talked about helping this huge wave of Baby Boomers accumulate enough wealth for retirement. That entails certain challenges and risks. Are you investing enough? Are you investing aggressively enough? Are you taking advantage of all your tax-saving opportunities? Starting in 2008, the first of the Boomers turned 62 and was for the first time able to receive Social Security benefits. You may be here because you are thinking about retiring soon yourself, and you will naturally start thinking less about saving for retirement and more about how to organize your income in retirement.
- So the three main points of this talk are as follows: Understanding the key financial challenges you will typically face in retirement Important planning concepts around achieving a successful retirement Taking those concepts and putting them into practice
- The risks for retirees are well-known — but you may find some of the specifics interesting, perhaps even startling. And as your retirement date approaches, it’s important to explore what these risks might mean to you and how you might address them. That’s planning.
- The first thing you should count on is being around for a while. Thanks to improvements in diet and medicine, we’re all living longer. The bad news is that your money will have to last longer, too. The traditional rule of thumb has been to plan for 20 years of income in retirement. And while your life expectancy at age 65 is about 20 years, life expectancy is an average — meaning that 50% of people outlive 20 years in retirement and 50% don’t. Those are the same odds as a coin toss — and probably not the kind of odds you’re looking for as you plan for an important life goal. The fact is, there is a significant likelihood you’ll live longer than 20 years — perhaps significantly longer.
- Another consideration is rising prices in retirement or inflation. Although it’s been years since the ultra-high inflation days of the early 1980’s, over time, even low levels of inflation will make a profound difference. For example, to keep up with a moderate inflation rate of 4%, someone relying on $50,000 in income when starting retirement would need over $160,000 in income at the end of 30 years to maintain the same standard of living.
- It’s clear how, in general, inflation impacts retirement over long periods of time. Let’s examine healthcare in the context of inflation. How do health-care costs compare with overall inflation and wages from employment? The answer is striking. Over the past decade or so, health-care costs have risen cumulatively by over 160% while inflation (as measured by historical CPI) has risen 38% and wages only 50%. In addition, recent research has suggested that a couple age 65 needs over $200,000 just to cover out of pocket healthcare costs in retirement.
- On the topic of Social Security, there is a lot of talk about whether it’ll be around and what it’ll look like in the future as Baby Boomers start to retire. Politics aside, there are significant challenges looming for Social Security as a result of a huge demographic shift in this country. It’s really a three-part story: First, seniors are living longer in retirement and, therefore, are receiving Social Security benefits for a longer period than previous generations. Second, we’ve got this huge wave of Baby Boomers — born just after World War II through 1964 — that will start to hit retirement age in the next several years. The first of them turned age 62 in 2008 and were able to begin receiving at least partial benefits. And third, there’s the “Birth Dearth,” or the Baby Bust, that started in the trailing years of the Baby Boom when birth rates started declining. In fact, they’ve stayed low ever since. So what you end up with is a smaller labor force supporting more and more retirees. In 2010, benefits owed exceeded taxes collected, and if nothing changes, the Trust Fund will be exhausted in 2036. We all know this is highly unlikely. What is more likely to happen is some or all of the following: Payroll taxes will be increased to maintain current benefit levels; Benefits will decrease or be delayed; Other tax revenue will be used to fund benefits; or The system will be changed to more of a defined contribution-style voluntary savings account, which is essentially partial privatization. You can expect a lot of discussion on the topic of Social Security over the coming years — and it’s likely to get very political. Regardless of the outcome, you should NOT be planning on Social Security as the primary basis for your retirement income, but it can and should be part of your retirement income plan.
- So, how concerned should we be about taxes in the future? During the past 50 years, tax rates have been at current levels or lower only 10% of the time. If tax rates revert back to pre-1980s levels, the tax savings investors enjoyed during their working years could be more than offset by higher taxes in retirement. Considering the current economic and political landscape, the prospect of rising tax rates must be allowed for as part of a comprehensive retirement strategy.
- Now that we’ve talked a little about a couple of things to keep in mind as you approach retirement, let’s talk about how to make the most of the money you’ve socked away. Make sure you’re not withdrawing too much Diversify to manage volatility and achieve growth Consider adding guaranteed income Be smart about taxes Address other potential risks
- One of the important expectations to manage is how much you can withdraw from your portfolio if you want it to last. This idea is called “sustainable withdrawals.” This chart takes a balanced portfolio mix of 60% equities, 30% fixed income, and 10% cash, then shows how long it would have lasted at different withdrawal rates. What’s interesting is that because we’re dealing in percentages, the dollar amount of your nest egg doesn’t matter. Whether you have $100 or $100,000, 50% is still half. The chart shows that if you took 10% out of your savings each year, you could have expected your savings to last about 10 years. Based upon this mix, a 6% annual withdrawal rate, increased each year to keep up with inflation, would have lasted around 17 years. The moral of this story is that you should try to limit your withdrawals to no more than 5%, given what we know about how long you are likely to spend in retirement.
- We looked at the role asset allocation plays by comparing different hypothetical portfolios based on historical market results (1926-present). This chart shows historical success (based on rolling time period analysis) for three asset mixes — ranging from conservative to growth — assuming a 5% systematic withdrawal rate that is inflated annually based on historical CPI. The mixes range from 20% equities in the conservative portfolio to 80% in the growth portfolio. And it looks at retirement or income generation periods of 20, 30, and 40 years. So what does it tell us? It tells us that if you had a 20-year retirement, you would have had a pretty solid probability of success withdrawing 5% each year, even with the most conservative portfolio. All of the asset mixes appear to do just fine. But what if you had a longer income stream — like 30, 35, or 40 years? The numbers tell us that you would have had to increase the expected return of your portfolio by including a larger allocation to equities in your portfolio. Depending on the income period you planned for and your tolerance for risk (i.e., running out of money during the period), you would have wanted to consider moving from a conservative portfolio to a portfolio that looked more like the balanced portfolio — with a mix of 60% equities, 30% bonds, and 10% cash. In fact, 60% to 70% equities seemed to be the optimal allocation to equities if you planned a 5% withdrawal for a long period of time. Going up to 80% would not have paid off since you took more market risk.
- When you retire can also have a major impact on your financial success in retirement. The math behind withdrawing or distributing assets IN retirement is much different than saving, or accumulating assets FOR retirement. If you begin withdrawing from a portfolio during a deep market downtown – like the latter half of 2008 for example – you have to liquidate more shares to create the same amount of income (because of the decline in the value of those shares). This is often referred to as “sequence of returns” risk. If you analyze three different scenarios – retiring in 1980, retiring in 1990 or retiring in 2000 it’s clear that timing can make a huge difference in outcomes. Those who retired and began withdrawals in 1980 or 1990 fared well over the first 10 years of their retirement (based on the given assumptions). In fact, even with taking 5% withdrawals each year adjusted for inflation, after 10 years the value of the initial $1 million nest egg had risen dramatically. Conversely, those retiring in 2000 didn’t fare as well. Their retirement nest egg was decimated first in early 2000 when the tech bubble burst and then again in 2008/2009 with the credit crisis and ensuing “Great Recession.” For this reason, it’s critical that retirees invest to avoid potential sharp market downturns or “shocks” when they are withdrawing assets from their portfolio.
- One of the key ways to cushion the effect of potential sharp market downturns is to diversify broadly across many different asset classes … not just traditional stocks and bonds. The advent of alternative or modern asset classes to the broad investing public provides options to design portfolios that seek more consistent returns while carefully managing volatility. This is often referred to as an absolute or total return approach to investing.
- One of the biggest differences in investing FOR retirement and investing IN retirement is the notion of an uncertain investment time horizon. Typically, as individuals save for retirement they have (at least an approximate) time frame in place until retirement. Consideration of this time frame will help drive investment decisions on how much risk to take. Conversely, retirees don’t have the luxury of a defined time horizon given the uncertainty around life expectancy. They can plan for a time horizon based on their life expectancy, but the reality is that half of individuals will live past their life expectancy. One way to hedge against this uncertainty is to incorporate guaranteed income into the plan. Guaranteed income provides a “floor” of income the individual cannot outlive. Consider this example given a balanced portfolio and 5% being withdrawn annually increased each year to account for inflation. Based on historical results, this portfolio would have survived 68% of the time. What if we allocated 25% of the portfolio to create a guaranteed income stream? Based on current immediate annuity rates for a 65-year-old male, adding guaranteed income would increase the survival likelihood of the remaining variable portfolio from 68% to 94%. Basically, since there is a guaranteed stream of income, there is less stress on the remaining portfolio to achieve the goal of a 5% income stream adjusted annually for inflation. Of course, committing funds to an annuity product involves relinquishing control over those funds in many cases. However, there are other products such as Guaranteed Minimum Withdrawal Benefits (GMWBs) that provide some additional flexibility to the contract owner.
- On that topic, it’s important to consider where your income — or more accurately your cash flow will come from — since where the money comes from determines its taxability. Dividends and capital gains are generally taxed at a 15% tax rate. Distributions from IRAs and 401(k)s are taxed as ordinary income at rates that range from 15% to 35% depending on your total level of income. So, given a choice of where to draw your next dollar from — all things being equal — you’d want to take it from a taxable account where you’ll generate a capital gain — taxable at a 15% rate — versus a tax-deferred account — taxable at some higher rate. In other words, as you plan the order in which you will liquidate assets to provide retirement income, you’ll want to delay dipping into your IRA and 401(k) balances as long as you can. Bottom line is that taxes you pay now unnecessarily reduce the amount of savings you’ve got working for you — so you miss out on not just the extra money paid as taxes, but also the earnings (potentially over a long time) on that money. Now, based upon current tax rules, you’ll have to start pulling money out of your IRA or 401(k) accounts once you reach age 70½, but as a general rule, the longer you delay accessing those monies, the better off you’ll be. Having said all that, it’s important to recognize that the optimal solution is based upon your specific fact set, so it’s important to talk to your financial advisor and tax professional about your situation. For example, these general rules can be skewed by your overall income, which drives your tax rate and other issues such as Social Security taxation.
- One strategy that can be effective in controlling taxes in retirement is the Roth IRA. In fact, since 2010, all investors regardless of their income level are eligible to convert Traditional IRA assets to a Roth IRA. The tradeoff is paying taxes today when the conversion is completed for the benefit of tax-free withdrawals in retirement. Also, unlike most traditional retirement accounts, there are no mandatory withdrawals at age 70½. Roth IRA owners can choose to leave assets within their account to grow tax free. Having a portion of your retirement savings in a Roth IRA in retirement provides more choice on where to draw income from given a particular tax situation. For example, if an investor is in a higher tax bracket in retirement and needs additional income, drawing funds tax free from the Roth may make sense. Conversely, those in a low tax bracket in retirement may choose to draw funds from a Traditional IRA. Even though taxes will be due, the individual is taking advantage of lower marginal tax rates while leaving more funds within the Roth IRA to grow tax free.
- On that topic, it’s important to consider where your income — or more accurately your cash flow will come from — since where the money comes from determines its taxability. Dividends and capital gains are generally taxed at a 15% tax rate. Distributions from IRAs and 401(k)s are taxed as ordinary income at rates that range from 15% to 35% depending on your total level of income. So, given a choice of where to draw your next dollar from — all things being equal — you’d want to take it from a taxable account where you’ll generate a capital gain — taxable at a 15% rate — versus a tax-deferred account — taxable at some higher rate. In other words, as you plan the order in which you will liquidate assets to provide retirement income, you’ll want to delay dipping into your IRA and 401(k) balances as long as you can. Bottom line is that taxes you pay now unnecessarily reduce the amount of savings you’ve got working for you — so you miss out on not just the extra money paid as taxes, but also the earnings (potentially over a long time) on that money. Now, based upon current tax rules, you’ll have to start pulling money out of your IRA or 401(k) accounts once you reach age 70½, but as a general rule, the longer you delay accessing those monies, the better off you’ll be. Having said all that, it’s important to recognize that the optimal solution is based upon your specific fact set, so it’s important to talk to your financial advisor and tax professional about your situation. For example, these general rules can be skewed by your overall income, which drives your tax rate and other issues such as Social Security taxation.
- Now, this isn’t just about income; it’s about the assets you have accumulated and the assets you’ll tap into to generate income during your retirement years. And any number of events that you may encounter during retirement may cause you to have to dip into your savings in a way that limits how long your money will last. For example, what if you or your spouse has a significant medical need early in retirement? The cost of deductibles, prescription drugs, hospital stays, and maybe even a short nursing home stay could really add up and may not be entirely covered by health insurance or Medicare. A $50,000 or $100,000 out-of-pocket expense could significantly affect your savings and overall income strategy. How would you address that kind of risk? You might have to shift your asset allocation or change your withdrawal rate to try to make your assets last longer. It might mean annuitizing to specifically address longevity risk. It also might mean buying life or long-term-care insurance to immunize a surviving spouse or your beneficiaries against catastrophic health care expense. What about the risk of lawsuits or creditors? Use of asset protection trusts may help. And what about the risk of failing to fulfill your charitable inclinations? Do you plan to leave something for the kids, the church, or your alma mater? What’s the best way to do that? Should you establish trusts to mitigate estate taxes?
- Now that we have covered important retirement income concepts (asset allocation, sustainable withdrawal rate, etc.), what are some considerations for putting a practical plan into place? We’ll review a couple of approaches here — matching expenses with income sources and aligning income resources into different “buckets” based on time horizon.
- This approach is fairly straightforward. Simply put, try to match up everyday essential expenses (food, transportation, utilities, housing, etc.) with defined, fixed sources of income such as Social Security and pension income. Then, utilize variable sources of income (employment, personal savings, investment withdrawals) to handle discretionary expenses such as travel. Lastly, have a plan in place to account for unforeseen circumstances.
- Some retirees may find it useful to segregate their nest egg into different “buckets” based on when they will need to the funds to meet their income needs. There are many different versions of this type of strategy. For example, in order to meet current income needs and prepare against any short-term circumstances, a portion of the overall nest egg would be invested in very safe, liquid accounts (CDs, money market, etc.). For the mid-term and longer-term buckets, accounts would be allocated according to their investment objective. For example, the longer-term bucket might consist of growth stocks or funds, real estate, and commodities in order to keep up with inflation and protect against the risk of outliving your assets.
- The retirement landscape will continue to evolve It’s critical for investors to prepare for certain (and uncertain!) risks A thoughtful income strategy can help you address these challenges and attain the lifestyle in retirement you desire Meet with your financial advisor to assess your personal situation
- We’ve covered a lot of ground in this presentation. I hope it was thought provoking and will help you better prepare for your years in retirement. For more information about the topics in this presentation, I urge you to visit these websites or check out one or more of the many books about building a successful retirement. Thank you.