Develop income for your retirement
Sunday January 2, 2011
Bradley R. Newman
"The volatility of the past two years combined with a healthy sense of uncertainty going forward has left almost everyone feeling a bit anxious about his financial future.
While the recent financial crisis and ensuing recession have made it more difficult and more important to save adequately for retirement, it has also made it even more critical for those approaching retirement to plan effectively for that transition and to manage their portfolios appropriately.
As retirement approaches, there are several steps involved in answering the most common question: "How do I turn my current assets into an income stream?"
Determine your income needs
From a planning perspective, the first question that needs to be answered is, "What will my retirement income needs be?" Generating an accurate and detailed assessment of your post-retirement income needs and expectations is a critical but often neglected step in the process.
The other essential element to the planning process is using realistic assumptions for variables such as investment returns, inflation, Social Security, taxation and life expectancy, Too often, unreasonable assumptions will lead to inaccurate planning results. Being overly optimistic about assumptions can lull you into a false sense of security that will lead to unpleasant surprises down the road, while using unnecessarily conservative assumptions can indicate that you need to work longer than is required.
Is your portfolio structured to generate income?
Assuming your asset base is sufficient to meet your ongoing income needs, the next issue to be addressed is structuring your portfolio appropriately to produce the required income.
As you prepare for retirement, maximizing portfolio growth will become secondary to steady and consistent income generation. Unfortunately, few people transition their investment portfolios for income generation soon enough, if at all. This transition should be carefully planned 10 years before retirement with implementation beginning gice to seven years before retirement.
The ubiquitous option of using an annuity to produce an ongoing income stream often is sold for its guarantees; however, the high expenses, steep surrender charges and general lack of flexibility will preclude this from being the ideal solution for most people.
Create a sustainable strategy
As you begin to rely on your portfolio for living expenses, it is important that the majority of planned distributions is based on ongoing income versus appreciation. The common methodology of selling investments as cash is required to meet distribution needs will eventually cause you to sell investments at an inopportune time.
By contrast, a well-developed and well-executed strategy to create a regular income flow via sources such as prudently managed individual bonds of the regular dividend payments from income-oriented stocks can provide the required income without having to sell an investment prematurely. Typically, this is where the benefits of professional portfolio management become most evident.
Control your taxation
In addition to using a reasonable tax rate assumption in your planning, there are several opportunities to create a lower and more consistent tax rate throughout your retirement.
The most basic technique is to structure preretirement savings in a fashion that creates an appropriate mix of qualified(pre-tax) and nonqualified (post-tax) savings. While qualified savings are attractive for deferring current taxation, eventual distributions from these plans typically offer little tax flexibility and are fully taxed at ordinary income rates.
Seize the opportunity
Although the past two years have created a difficult environment for planning and investing, the result is heightened sense of awareness for addressing each issue with a disciplined process.
While you cannot control the economic and market driven environments, having a detailed understanding of your situation, an appropriate strategy to implement and the disciplining to implement it will ensure your ultimate success.