Showing posts with label building retirement income. Show all posts
Showing posts with label building retirement income. Show all posts

Wednesday, October 12, 2016

The Retirement Income Red Zone Danger

If you have put together a sizeable portfolio prior to retirement, knowing how to protect those assets during your first five years after retirement will be extremely important, especially if you want to be sure they will last the remainder of your life.  These first five years after retirement are sometimes referred to as the red zone ... the time when decisions you make can have the biggest impact on your future.

What Bad Decisions Do People Make in Early Retirement?

When people first retire, they often have a number of of pent-up dreams they wish to fulfill.  They still feel healthy and they may want to move somewhere new, travel, buy a boat or RV, and have a little fun.  After all, they have waited and saved their entire lives for this moment and they want to enjoy it before age and illness slows them down.

Next, retirees often stop saving and putting aside money for the future.  As they pull money from the principal without replacing it, retirees gradually see their assets become depleted.

In addition, retirees sometimes do not prepare adequately for rising expenses or problems that could come up in the future, including extra medical expenses such as health insurance deductibles, expensive treatments, long-term care, etc. They also sometimes fail to prepare for things like replacing their car, hot water heater, furnace or other expensive items.

Even if new retirees do not make any of the above mistakes during their first five years after retirement, their assets could become depleted because of poor investment decisions.

Should You Invest for Growth or Safety?

Investment advisors recommend that your retirement assets should be invested for both growth and safety ... but what is the correct balance?  According to an article by CNBC writer, Kelley Holland, "Five Crucial Retirement Years For Your Money," it is extremely important that you do not have negative investment returns during your first five years of retirement.  When experts from Prudential Insurance examined two hypothetical $1 million portfolios, Portfolio A had negative returns for 4 of the first 5 years, but positive returns for all of the remaining years of its existence.  Portfolio B had all positive returns in the first 5 years, but had negative returns in 4 of 5 years between years 25 and 30.

What were the results?  Portfolio A had dropped to zero within 15 years.  Portfolio B had doubled in value by the end of 30 years, despite the negative returns at the end.

What Should an Investor Do?

After examining the results of these two hypothetical portfolios, experts believe it is important that investors manage their money conservatively early in retirement so their portfolio continues to grow in value, even modestly, during this crucial period.  In order to do this, it would be a mistake for retirees to make risky investments or begin depleting their principal for trips or other large purchases.

Retirees need to work with their investment advisor to make sure their money is wisely invested.  Holland recommends that no more than 40 to 60 percent of a retirement portfolio should be in stocks (and, obviously, these should be Blue Chip stocks, not high-risk ones).

As retirees begin to live off their assets, their withdrawals should be modest and their asset allocation should be conservative, particularly during the first five years.  In other posts on this blog, we have reported that most investment advisors suggest that no more than 3 percent of assets should be withdrawn for living expenses during retirement, with tiny increases in the withdrawal rate as the years go by.  If the principal balance is invested conservatively, the assets of most people should last well over 30 years.

Some investment advisors also recommend that any income from the assets that is in excess of what is needed for living expenses should then be invested in stocks which, hopefully, will appreciate and provide an extra cushion for the future. This extra cushion will be especially helpful if there is a stock downturn in the future ... which is almost certain to happen every few years.

In the end, this plan is the one that is most likely to leave you with enough assets to last the remainder of your life.

If you are interested in reading more tips about handling your retirement income, where to retire, common medical problems, Medicare, Social Security and more, use the tabs or pull-down menu at the top of the page to find links to hundreds of additional articles.

You are reading from the blog:  http://www.baby-boomer-retirement.com

Photo credit:  morguefile.com

Sunday, September 11, 2011

How to Build an Annuity Ladder


Did you know that 10,000 Baby Boomers are turning 65 every day? This statistic was published in the Sept. 11, 2011 edition of the Sunday Wall Street Journal and, by some estimates since then, the number has increased slightly in the years since then. They also had some interesting information in the same article about the fact that many Baby Boomers are going to be short of money after they quit working. I have read an increasing amount of information since that time about how much financial strain the Baby Boomer generation could experience as they age.

One decision most Boomers are going to have to make in the coming years is how to supplement their Social Security. Between now and the day they retire, Baby Boomers need to plan to pay down their bills, while building up their investments and retirement savings. After maxing out the contributions to an IRA or 401(k), how should Boomers use the proceeds to enhance their future retirement income?  One way to do this is to build an annuity ladder.

Interest rates are currently very low and so are dividend yields. This has been going on for several years and is only expected to change slowly over the next few years, although the Fed has been raising interest rates lately.  Most retirees should not plan to put their money in CD's and live off the interest. Nor should they plan to buy Blue Chip stocks and live off the dividends, at least not now. Most Boomers will not be able to do these things unless yields increase significantly in the next 3 to 5 years. The Wall Street Journal reported that some people are investing in bonds from other countries, like Brazil and France, since their yields are higher than they are currently in the United States.

Make an Annuity Ladder Part of Your Financial Plan

According to the Wall Street Journal article, another way that Baby Boomers are hoping to increase their retirement income is to build an annuity ladder. When doing this, retirees buy a new annuity every 5 years. The hope is that the yields will rise each time they purchase a new annuity.

Here is an example of how that would work.  Let's say you need an extra $400 to $500 a month in retirement income, above what you expect to receive from Social Security and any pensions you might have.  If you have saved $100,000, you could put the entire amount into a lifetime annuity and receive that much in return.  However, you will have tied up all your savings in one annuity, at a time when interest rates and annuity returns are at all-time lows.

On the other hand, it would cost about $25,000 to get around $420 a month for 5 years. At the same time, you could invest the remaining $75,000 for the next five years and expect to increase the size of your remaining nest egg so that it will be worth about $82,000 to $90,000 at the end of that time.

At the end of the five years, you still have a sizable amount of money you can invest.  You can do one of two things with it:

First, you could buy another five year annuity and repeat the process.  By this time, if interest rates have risen, your return would be higher than $420 a month.  This is an annuity ladder.

Another choice is available if interest rates have risen significantly in five years and you can get a 6% return.  In this case, you can find a long-term investment for your remaining $85,000 or put in in a CD at 6%.  Your return would be $425 a month, and you would still have full ownership of your $85,000.

Disadvantage of an Annuity Ladder

While annuity ladders can be one part of your retirement plan, they may not be the best choice for most people.  For example, consider the $420 a month return on the $25,000 described above.  You could just put the $25,000 in a bank account and withdraw $420 a month from it and it would last more than five years, even if you were only receiving 1% interest.  Consequently, there is actually no advantage to purchasing an annuity.  You could simply create your own.

Do the math before buying an annuity.  If you truly believe that your return from an annuity will be better than anything you could possibly earn from other investments, then you may want to make an annuity ladder part of your retirement plans.  If not, you may want to investigate other options.

As always, I highly recommend that you consult a retirement planner, your CPA and other advisers before committing a large amount of your assets to any investment plan.

If you are looking for additional retirement information, use the tabs or pull down menu at the top of the page to find links to hundreds of additional articles on financial planning, medical issues, changing family relationships, Social Security, Medicare where to retire, and more.

You are reading from the blog:  http://www.baby-boomer-retirement.com

Photo credit:  Morguefile.com