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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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slide1

Securing Your Lifetime Income Stream

Bob Carlson

Editor, Retirement Watch

AAII-DC

October 2012

800-552-1152 www.RetirementWatch.com

slide2

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

slide3

Optimize All Your Tools

  • Social Security
  • Employer pension
  • Annuities
  • Distribution strategies
  • Taxable investments
  • Tax-deferred vehicles

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

slide4

Two Key Points

  • The cost of almost everything will
  • increase
  • Have a written plan

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

slide5

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

slide6

Secure Basic Expenses

  • Sources of guaranteed income:
    • Social Security
    • Employer pensions
    • Annuities

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

slide7

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

slide8

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

slide9

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

slide10

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

slide11

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

slide13

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
slide15

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.

slide16

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

slide17

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

slide18

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

slide19

Active Investing

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

slide20

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

slide21

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

slide22

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

slide23

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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