Creating Your Retirement Income With 3 Steps

by admin 4. February 2014 16:23

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By KAREN DEROSE

Preretirees should think about how they’ll allocate their assets to meet long-term income needs. A strategy that hedges against market volatility and places part of your assets in a low-risk, low-growth accounts is a good place to start.

But as you balance your retirement income needs with your savings and investments, you may want (depending on your risk tolerance) to consider taking more risk with some funds that you won’t need for several years. Giving assets time for potential growth can help protect your savings against the ravages of inflation and may make them last longer. There is no assurance that by assuming more risk you are guaranteed to achieve better results. While no investment plan or strategy can guarantee success, diversification may help reduce risk and volatility. Diversification neither ensures a profit nor protects against a loss.

The bucket list

Think of your assets as a series of buckets: one absolutely stable bucket for short-term goals, another for intermediate-term needs, and a third with potential for long-term growth. Although you’ll certainly want to discuss your allocations with a financial planner, consider these guidelines:

1. The short-term bucket (savings you’ll withdraw in the next three years). This is your principal source of near-term income, so you will need stability and easy access—particularly for the amount of money you know you’ll need during the next 12 months. Consider holding those funds in a savings or money market account.

With the rest of your short-term assets, consider constructing a ladder of certificates of deposit (CDs). Say you have $50,000 saved for years two and three. You could invest $12,500 in six-month CDs, $12,500 in one-year CDs, and so on until you use the last $12,500 to buy two-year CDs. As each set of certificates matures, you would reinvest the principal in another group of two-year CDs. A ladder protects against the risk of investing all your short-term money when interest rates are low and also lets you to take advantage of longer-term CDs’ typically higher interest rates. Bank CDs are FDIC insured and offer a fixed rate of return. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of the investment at $1.00 per share, it is possible to lose money by investing in the fund.

2. The intermediate-term bucket (funds you’ll need in four to 10 years). Devote these funds to fixed income investments that provide a measure of income and stability. For this category, investors should consider high-quality fixed income investments. For example, a bond of reasonable quality will return your original investment at maturity and will pay interest in the meantime.

With interest rates at historic lows, you should build flexibility into your fixed income portfolio. Building a bond ladder—similar to the treatment of CDs mentioned above—could help you do that. If interest rates rise, the principal that comes due each year can be used to capture higher rates. You might also consider medium-duration mutual funds that hold a broad range of bonds, which can provide diversification and may help boost your intermediate-term bucket’s yield. Bonds have fixed principal value and yield if held to maturity. Bonds have inflation, credit and interest rate risk. Investors may lose money if bonds are sold before maturity.

3. The long-term bucket (savings you’ll withdraw in more than 10 years). The final bucket provides long-term growth potential, which can serve as a hedge against inflation and help boost your withdrawals and retirement income down the road. Here, you can weight your investments with equities, which offer growth potential. Equities can have fluctuating principal and returns based on changing market conditions.

If you’re one of the many investors inclined to hold fixed income investments in the long-term bucket, think again. It’s a risky strategy. If you’re approaching retirement, you may have 20, 30 or even 40 years of life ahead of you, and you’ll need equity-like returns to help fund a long-term horizon.

Each year, of course, you’ll draw down a portion of your short-term bucket. Your financial planner can help you determine the appropriate strategy for using assets from your other buckets to help replenish it. That strategy may include selling shares from your long-term bucket as the market recovers, using the proceeds to shore up your short- and intermediate-term savings. Many investors find it tough to sell winners, but if your growth bucket has a big run, putting some of those assets toward your floor will cushion your savings from future bear markets.

Systematic retirement plan distribution strategies depend on variables that are difficult to predict, including inflation, market fluctuations, taxes, interest rates, and your own life expectancy and health issues. Withdrawals during a difficult market environment may jeopardize your retirement income plan. When choosing a withdrawal method, have alternative strategies ready to help meet your retirement income needs during a difficult market environment.

Talk to your financial planner about:

  • Securing part of your portfolio from market volatility
  • Using CD and bond ladders to help build an income stream
  • Maintaining some of your long-term retirement assets with an exposure to growth potential

The content of this material was provided to you by Lincoln Financial Advisors Corp. or Lincoln Financial Securities Corporation for its representatives and their clients.


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