Securing Your Lifetime Income Stream
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Securing Your Lifetime Income Stream. Bob Carlson Editor, Retirement Watch. AAII-DC October 2012. 800-552-1152 www.RetirementWatch.com. The Big Challenges. The Fed’s Zero Interest Rate Policy Both inflation & deflation are possible

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Securing your lifetime income stream

Securing Your Lifetime Income Stream

Bob Carlson

Editor, Retirement Watch

AAII-DC

October 2012

800-552-1152 www.RetirementWatch.com


Securing your lifetime income stream

The Big Challenges

  • The Fed’s Zero Interest Rate Policy

  • Both inflation & deflation are possible

  • Stock market volatility and low returns across the board

  • Income tax changes

  • Possible changes in benefits

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Optimize All Your Tools

  • Social Security

  • Employer pension

  • Annuities

  • Distribution strategies

  • Taxable investments

  • Tax-deferred vehicles

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Two Key Points

  • The cost of almost everything will

  • increase

  • Have a written plan

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Start with Spending

  • Start with a custom estimate

  • Spending will change over time

  • Don’t forget inflation

  • Prioritize expenses. What’s important to

  • you?

  • Medical and long-term care are wild

  • cards

  • It’s a plan, not a rule book

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Secure Basic Expenses

  • Sources of guaranteed income:

    • Social Security

    • Employer pensions

    • Annuities

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Maximize Social Security

  • Numerous strategies to increase benefits

    • Delay beginning

    • Coordinate with spouse

    • Special rules for divorced, widowed

    • Higher-level strategies:

      • Claim-and-suspend

      • Claim spousal benefits first

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

How to Use Annuities

  • Two types to consider:

    • Immediate annuities

    • Longevity annuities (deferred income

    • annuity)

  • Shift the risk of low returns and longevity to insurer.

  • Consider inflation protection

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Immediate Annuity Tips

  • Shop around

  • Purchase age 70 or later to increase payout

  • Should you wait for higher yields?

  • Greater protection/control = lower payout

  • Annuities vs. Personal Investments:

     Certainty vs. potential

     Security vs. control & flexibility

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Using Longevity Annuities

  • The 88%/12% strategy

  • Plan for only 20 years with other assets

  • Or late-in-life supplement

  • No inflation protection

  • Women most likely to benefit

  • No legacy available

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Portfolio Distribution Strategies

  • The 4% rule

  • Flexible or cyclical spending

  • Yale Endowment Strategy

  • Put all or most of it in annuities

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


The 4 spending rule

The 4% Spending Rule

  • 1st year: withdraw 4.2% of value

  • Subsequent: Increase by inflation

  • Higher withdrawal rate available when:

    • Investments at low valuations

    • Different portfolio

    • Low inflation

    • No guarantee portfolio will last

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Flexible Spending Policy

  • Three stages of spending

    • Early, pent-up spending

    • Middle years

    • Later years

  • Medical expenses could pop up at any time but likely in later years

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Yale endowment strategy

Yale Endowment Strategy

  • Set withdrawal rate

  • Each distribution has two parts:

    • 70%: Withdrawal rate plus inflation

    • 30%: Withdrawal percentage times portfolio value


Securing your lifetime income stream

Yale Endowment Strategy

Example: $500,000 fund; 5% spending rate. Withdraw $25,000 first year. Second year: inflation was 2%; portfolio declines to $480,000.

1. First year’s spending plus inflation = $25,500. Multiply by 70% = $17,850.

2. Fund value times spending rate = $24,000 times 30% = $7,200.

Total withdrawal = $25,050.


Securing your lifetime income stream

Portfolio Investment Strategies

  • Abandon traditional retirement strategy

  • Consider:

    • Buy-and-hold strategy

    • “Buckets” strategy

    • Active management or tactical asset allocation. Opportunistic investing.

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Buy-and-Hold Portfolio

  • Need true diversification:

    • Investments with low correlations

    • Low correlations with major indexes

    • Add more asset classes

    • Add different strategies

  • Can use either indexes or active managers

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Retirement “Buckets” Strategy

  • Also known as liability-driven

    investing

  • Safe fund for 2-5 years of expenses

  • Longer-term, diversified fund

  • Can break down further

  • Much like saving for college

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Active Investing

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Active Investing

  • Risk management is key

  • Search for value and emerging trends

  • Increase and decrease allocation to

  • assets

  • Target one- to three-year holding

  • period

  • Need a plan to sell or sell signals

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Active Investing for Income

  • Dividend-paying stocks

  • Preferred stock

  • Real estate investment trusts

  • High yield bonds

  • Master limited partnerships

  • International bonds

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Invest in the Right Accounts

  • Ordinary income in tax-advantaged accounts

  • Long-term capital gains in taxable accounts, except:

    • Much higher return on capital gain assets

    • Lower tax rate in retirement

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


Securing your lifetime income stream

Withdraw in the Right Order

  • Generally: Taxable accounts first, tax-free accounts last, except:

    • Taxable account return is at least 4% higher

  • Always manage taxable accounts to minimize taxes

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com


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