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Securing Your Lifetime Income Stream

Learn how to optimize your tools and secure your income stream for retirement. This comprehensive guide covers maximizing Social Security, using annuities, distribution strategies, and portfolio allocation. Don't leave your retirement income to chance, have a written plan.

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Securing Your Lifetime Income Stream

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  1. Securing Your Lifetime Income Stream Bob Carlson Editor, Retirement Watch AAII-DC October 2012 800-552-1152 www.RetirementWatch.com

  2. 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

  3. Optimize All Your Tools • Social Security • Employer pension • Annuities • Distribution strategies • Taxable investments • Tax-deferred vehicles Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

  4. Two Key Points • The cost of almost everything will • increase • Have a written plan Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

  5. 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

  6. Secure Basic Expenses • Sources of guaranteed income: • Social Security • Employer pensions • Annuities Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. Yale Endowment Strategy • Set withdrawal rate • Each distribution has two parts: • 70%: Withdrawal rate plus inflation • 30%: Withdrawal percentage times portfolio value

  15. 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.

  16. 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

  17. 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

  18. 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

  19. Active Investing Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

  20. 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

  21. 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

  22. 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

  23. 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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