Making a Retirement Paycheck – A Retirement Income Planning Series


Whatever your retirement dreams are, they can still come true. It just depends on how you plan and manage your resources. On any trip, it is helpful to have an idea of ​​where you are going, how you want to travel, and what you want to do when you get there.

If that sounds like a vacation, then it should. Most people spend more time planning a vacation than they do in retirement. And if you view retirement as the next act in your life and do it right, you won’t get bored or run out of money to continue the journey or get lost and make bad money decisions along the way.

How you manage it matters

How much you really need depends on what lifestyle you are expecting. And it’s not necessarily true that your retirement expenses go down. Assuming you have an idea of ​​what your annual spending might be in today’s dollars, you now have a goal to aim for in your planning and investment.

Add up the income from the sources that you expect in retirement. This can include social security benefits (the system is solvent for at least 25 years), pensions (if you are lucky enough to have such an employer-funded plan), and any income from jobs or that new career.

Foundation Spending: Pretend you’re like Harvard or Yale

Consider taking the same approach that keeps large organizations and foundations going. They plan for a long time so they aim for a spending rate that allows the organization to sustain itself.

1.Find your gap: Take your budget, subtract the expected sources of income and use the result as the target for your withdrawals. Keep this number at no more than 4% to 5% of your total investment portfolio.

2.Use a mixed approach: Check every year to see whether you are increasing or decreasing your withdrawals based on 90% year-on-year rate and 10% investment portfolio performance. If it goes up, you get a raise. When assets go down, it is time to tighten your belt. This works well in times of inflation to help you maintain your lifestyle.

3. Stay invested: You might be tempted to save yourself from the stock market. But despite the roller coaster ride we’ve seen, it’s still wise to invest some in stocks. Given that people are living longer, consider using this rule of thumb for your stock allocation: 128 minus your age. Regardless, you should really be holding at least 30% of your investment portfolio (excluding collateral) in stocks.

If you think the stock market is scary because it is prone to volatile periods, consider the risk inflation poses on your spending power. Bonds and CDs alone have not kept pace with inflation historically. Only investments in stocks have demonstrated this ability.

But invest wisely. While asset allocation makes sense, you don’t have to be buy-and-hold and accept being tossed around like a yo-yo. Your core allocation can be complemented by more tactical or more defensive investments. And you can change the mix of stocks to dampen the roller coaster effects. Consider including stocks of large companies that pay dividends. And add asset classes that are not tied to the ups and downs of the major market indices. These alternatives will change over time, but the defensive ring around your core should be reevaluated from time to time to include things like commodities (oil, agricultural products), commodity producers (miners), distributors (pipelines), convertibles, and managed Add futures.

4thInvest for income: Don’t just rely on bonds, which have their own risks compared to stocks. (Think about the risk of credit default or the impact of higher interest rates on the fixed rate coupon on your bond).

Mix up your bond holdings to take advantage of the characteristics of different bond types. To protect yourself from the negative effects of higher interest rates, consider floating rate corporate bonds or a mutual fund that includes them. By adding hi-yield bonds to the mix, you also offer some protection against potentially higher interest rates. Although they are called junk bonds for a reason, they may not be as risky as other bonds. Add Treasury Inflation-Protected Securities (TIPS) backed by the full trust and credit of the US government. Add in the emerging market bonds. Although currency risks exist, many of these countries do not have the same structural deficits or economic problems as the US and the developed world. Many have learned their lessons from the debt crises of the late 1990s and have not invested in the exotic bonds created by financial engineers on Wall Street.

Include dividend-paying stocks or equity funds in your mix. Large overseas companies are great sources of dividends. Unlike the US, there are more companies in Europe that tend to pay dividends. And they pay monthly instead of quarterly like here in the US. Balance this with hybrid investments like convertibles that pay interest and offer appreciations.

5. Build a safety net: To get a good night’s sleep, use a bucket-dipping approach to the investment bucket to replenish the reserve that 2 years of spending in cashless investing should have: savings, orderly CDs, and fixed annuities.

Yes, I said pensions. This safety net is supported by three legs so that you don’t put all your eggs in annuities, let alone a pension of a certain term. For many, this may be a dirty word. But the best way to get a good night’s sleep is knowing that your “must-have” expenses are covered. You can get relatively inexpensive fixed annuities without the frills and complexities of other types of annuities. (While tempting, I would tend to pass on “bonus” annuities because of the long time buyback fees). You can stagger the terms (1-year, 2-year, 3-year and 5-year) as with CDs. Also, to minimize the risk for a single insurer, you should consider spreading it across more than one well-rated insurance carrier.


Source by Steven Stanganelli