Smart retirement income strategy

6 solid retirement income strategies

Everyone knows that in order to have a pleasant retirement, it is necessary to prepare financially. Just like in all successful ventures, the foundation of a good retirement is planning. A good reward for your labor of the past years will be to have a strategy to generate income that can last your entire lifetime—income that can weather inflation, market ups and downs, unexpected expenses, and, yes, longevity.
While fixed-income investments, stocks and bonds may appear to be productive means of realizing income during retirement, certain factors should be considered before signing up for any of them. You might need to consult your financial planner to reason out these factors. Financial planners recommend 40-60 percent in stocks at the start of your retirement, with the rest in cash and fixed-income investments to tamp down risk. More conservative investors might start with 30 percent in stocks and 70 percent in fixed-income investments, while aggressive investors will reverse it to 70 percent and 30 percent
Here is a reason you need an expert financial planner
Most investors see fixed-income investments as being less risky than stocks and it’s true that fixed income is much more predictable than stock investments. However, fixed income does have its own risks. They include:
• Default risk: If something happens to the borrower, then it might not be able to repay the loan, leaving you with a loss.
• Interest rate risk: If the prevailing interest rates rise, then you’ll be locked into a low-rate fixed income investment until it matures. Rising rates also typically cause the prices of fixed income investments on the secondary market to fall.
• Inflation risk: Fixed income involves trading money now for the promise of receiving money later. However, high inflation can erode the purchasing power of the money you get back from the borrower in the future. A few fixed income investments have provisions that allow for inflation-based adjustments, but most leave the investor exposed to inflation risk
Stocks: It is a type of security that gives stockholders a share of ownership in a company. Stocks represent an ownership interest in a corporation. As an investment strategy, it also comes with its own limitations
• Market risk: An investor may experience losses due to factors affecting the overall performance of financial markets
• Inflation risk: Inflation risk, also called purchasing power risk, is the chance that the cash flowing from an investment today won’t be worth as much in the future. Changes in purchasing power due to inflation may cause inflation risk
• Liquidity risk: Liquidity risk arises when an investment can’t be bought or sold quickly enough to prevent or minimize a loss
Despite all of these limitations associated with any of the three means of the above retirement income strategy, a general guideline for ‘safe’ investment is discussed below
• Aim for a diversified portfolio with U.S. and international stock funds, an emerging-markets stock fund, and a dash of real estate and commodities. On the bond side, given the low interest rate environment, go with short-term bonds, floating-rate bank loan funds and high-yield bond funds.
• Consider putting money in a target-date fund, which adjusts the mix for you. Be aware that these funds have different asset mixes and different timetables for adjusting them. You might start with a 50/50 stock/bonds split at first and move to 30 percent stocks and 70 percent bonds over seven years, or start off with 50 percent in stocks, 40 percent in bonds and 10 percent in short-term funds.
• Carve out the part of your money you would otherwise put in bonds and buy an immediate fixed annuity delivering a guaranteed income for as long as you live. If you buy an annuity with 30-40 percent of your savings, that’s the bond part of your portfolio, and stocks can make up the rest.
• Consider tapping your home equity with a reverse mortgage if you can’t get by on Social Security, a pension and savings. You can supplement the amount you have to work with by working part time for the first few years of retirement, postponing the time you draw down principal until you’re required to take minimum distributions.
• The longer you wait to tap your nest egg, the shorter your time horizon becomes. To maximize your benefits, work a little longer and delay taking Social Security as long as you can.
Put money into different buckets — one for cash, one for fixed income and one for growth (stock funds). The cash bucket is your safety net — it holds enough to cover living expenses for two to three years. Dip into it for bills. As the cash runs down, take profits from stocks and bonds to fill the bucket again. If stocks are for growth, consider bonds as ballast. Your bond funds should invest mainly in Treasuries and other government securities. It’s best to buy bonds in the form of index funds.
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