Those long-awaited Golden Years have arrived, and you're
enjoying a well-deserved retirement. You've saved and invested
wisely to provide a financial cushion, but making the most of your
assets now -- maximizing your retirement income -- may require a
brand new strategy. Where do you go from here?
Factor In the Variables
Investing during retirement can be uncharted terrain for many
people. An appointment with your investment professional to
reassess your portfolio can be crucial in helping you meet your
changing needs. With uncertain variables such as longer life
expectancies, the changing rate of inflation, and the possibility
that you could outlive your retirement funds, you'll want to be
sure your investments will keep up with you and outpace the cost of
living.
Neglecting your investment strategy now could be costly.
Inflation is one reason; even at a moderate 3% rate, inflation can
substantially cut the purchasing power of your savings over 20
years. Another is that you may find your hard-earned cash dwindling
too fast. A balanced portfolio of investments to maximize security
while building needed profitability may be crucial to your
financial security.
Keep Stocks Working for You
Many people believe that retirement means investing everything
in low-return money market accounts1 or certificates of
deposit (CDs). While these investments do offer little risk to
principal, you should also consider the risks that (1) your assets
will not keep pace with inflation and (2) you may outlive your
assets. Although past performance is no guarantee of future
results, stocks have historically outpaced inflation by the widest
margin and have provided the strongest returns over the long
term.2
A Focus on Yield
Along with some stock investments, a significant portion of your
principal will likely be invested in fixed-income investments to
provide a consistent stream of income. Depending on your needs,
such investments may include high-quality corporate and government
bonds, tax-exempt bonds, or high-yield "junk" bonds.3
How much risk (maturity and credit risk) you need to take with
these investments depends in part on how much income you need. For
example, if you can get by with a low annual return, you might be
comfortable with high-quality, medium-term, fixed-income
investments. But if you need to generate higher returns on your
money, you'll need a longer-term strategy and will likely have to
take on more risk.
You can buy individual government bonds of varying maturities
and coupon rates to match your projected cash flow needs. In fact,
this is how many insurance companies and banks manage cash flows to
minimize interest rate risk. They first estimate a schedule of cash
outflows and then buy securities "maturing" along the same
schedule. You can use a similar strategy by buying bonds maturing
(principal repaid) in one, two, and three years based on your
expected cash needs in those years. You'll earn the stated rate of
interest and likely have little risk of loss of principal, since
you shouldn't need to sell the bonds before the scheduled due date.
The rest of your bond portfolio may be invested in higher yielding,
longer term investments.
Now That You're Retired,
Maximize Your Retirement Income |
Security |
Risk |
Income |
Growth Potential |
3-Month T-Bill |
Low |
Low |
Lowest |
Commercial Paper |
Low |
Low |
Low |
Dividend-Paying Stock |
Medium |
Low |
Medium |
Intermediate Bond |
Medium |
Medium |
Low |
Corporate Bond |
Medium |
Medium |
Low |
Convertible Stock |
Medium |
Medium |
Low |
High-Yield Bond |
High |
High |
Medium |
Growth Stock |
High |
Low |
High |
International Stock |
High |
Low |
High |
Your Retirement Distribution
For many people, retirement is also a time to elect a
distribution from their company pension and retirement savings
plans. Many people may also begin taking distributions from an IRA
or annuity at this time.4
Because these distributions often involve complex analysis of
income and tax scenarios to determine the best choice for your
unique circumstances, it's wise to consult your financial
professional.
If you have substantial assets that generate more income each
year than you spend, you may want to consider investing in a
variable annuity. Your investment earnings will grow and compound
tax deferred until withdrawal. However, when you withdraw earnings,
they are taxed as ordinary income regardless of how long they have
accrued in your account. Because these tax rates may be higher than
capital gains tax rates, you may want to use variable annuities for
your fixed-income investments and your most aggressive stock
investments -- those that typically experience high turnover and
therefore generate substantial short-term income distributions
(which are taxed as ordinary income rather than as long-term
capital gains).
Annuities also allow you to continue making contributions after
retirement and to defer withdrawals, often until age 80 or later.
Withdrawals from traditional, non-Roth IRAs, however, must begin no
later than April 1 following the year you turn 72. After that, you
must make your second withdrawal by December 31 of that year and
future withdrawals by each of the subsequent December 31
dates. (This age was increased from 70½, effective
January 1, 2020. Account holders who turned 70½ before that
date are subject to the old rules.)5
Components of Total Return |
 |
While stocks have historically provided income and capital
appreciation, the total return of bonds has been composed primarily
of interest income. Past performance is not indicative of future
results.
Source: ChartSource®, DST Retirement
Solutions, LLC, an SS&C company. For holding periods
ending December 31, 2019. Stocks are represented by the S&P 500
index. It is not possible to invest directly in an index. Index
performance does not reflect the effects of investing costs and
taxes. Actual results would vary from benchmarks and would likely
have been lower. Past performance is not a guarantee of future
results. © 2020 SS&C. Reproduction in whole or in part
prohibited, except by permission. All rights reserved. Not
responsible for any errors or omissions. (CS000037) |
Donate Appreciated Assets to Generate Income
You can donate highly appreciated assets to charity and generate
current income, along with a tax deduction, using a charitable
remainder trust. With the top capital gains tax rate at 15% for
most investors, the value of the tax deduction may be less than in
previous years but could still provide an advantage to wealthy
individuals.
A charitable remainder trust requires that you donate the asset
to a qualified charity or foundation, which will establish a trust.
The trustee sells the asset at market value, invests the proceeds,
and pays you annual investment income. You receive a current tax
deduction based on the expected remainder value of the asset and
your life expectancy. At your death, the trust is paid to the
designated charity.
Develop a Strategy for Income and Growth
An investment portfolio can work hand-in-hand with retirement
accounts, annuities, and trusts to meet your income and growth
needs. To help determine what kind of investment vehicles may be
appropriate for your particular circumstances (as well as how much
of your portfolio should be allocated to each asset class),
consider your risk tolerance and your needs for income vs. growth.
You also want to consider the tax consequences of each option. Your
financial professional can help you find a balance that is
appropriate for you. Once you've established a suitable portfolio,
you might consider using your fixed-income and money market
investments1 -- and any retirement plan and trust
distributions -- for your annual expense money. Of course,
continuous attention to detail can help keep you ahead of the game
-- and well cushioned against the rising cost of living.