InR Advisors is now part of CBIZ, one of the nation’s Top 100 Plan Advisers.   Please click here for more information.

Now That You’re Retired, Maximize Your Retirement Income

 

Key Points

» Factor In the Variables
» Keep Stocks Working for You
» A Focus on Yield
» Now That You’re Retired, Maximize Your Retirement Income
» Your Retirement Distribution
» Components of Total Return
» Donate Appreciated Assets to Generate Income
» Develop a Strategy for Income and Growth
» Points to remember

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-returning 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 that (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.
So you should consider keeping a portion of your portfolio invested
in stocks and stock mutual funds throughout your
retirement.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, and high-yield “junk” bonds.3
How much risk (maturity and credit risk) you need to take in these
investments depends in part on how much income you need. For
example, if you can get by with a 5% annual return, you might be
comfortable with high-quality, medium-term, fixed-income
investments. But if you need to generate 8% or more 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.

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
advisor.

If you have substantial assets that generate more income each year
than you spend, consider putting some of your investments 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 following the year you turn 70 ½. After
that, you must make your second withdrawal by December 31 of that
year and withdrawals by each of the subsequent December 31
dates.

Components of Total Return
While stocks have historically provided income and capital
appreciation, the total return of bonds has been comprised
primarily of interest income. Past performance is not indicative of
future results.

Sources: Standard &
Poor’s; the Federal Reserve, 1926-2008. CS000037. Stocks are
represented by Standard & Poor’s Composite Index of 500
Stocks, an unmanaged index of common stocks considered
representative of the stock market. Bonds are represented by
long-term Treasuries (10+ years). Investors cannot invest directly
in any index. The performance shown is for illustrative purposes
only and is not indicative of the performance of any specific
investment.

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, and then 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 tax consequences of each option. Your
financial advisor 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.

Points to Remember

 

  1. Inflation continues to eat away at the value of your savings.
    Stocks offer the best potential for fighting inflation over the
    long term.
  2. Only a portion of your money is invested for the short term.
    Today’s longer life expectancies mean a component of your
    portfolio may be invested for 20 or more years.
  3. Income investments include bonds and dividend-paying
    stocks.
  4. You may have to elect payment options for your company pension
    and retirement plans. You may also elect to begin withdrawals from
    your IRAs. Consult your financial advisor.
  5. An annuity can help you shield investment earnings from
    taxes.
  6. Charitable remainder trusts are vehicles for converting
    appreciated assets into income.

1An investment in a money market fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any
other government agency. Although the fund seeks to preserve the
value of your investment at $1.00 per share, it is possible to lose
money by investing in the fund.

2Share prices may fall in value as well as increase, and
there is no assurance that the full value of an investment in
stocks can ever be recovered.

3Bond values are not guaranteed. A bond’s market price
may vary significantly from face value. Investors may receive the
face value or redemption value of a bond only if it is held to
maturity or call date. High-yield bonds present greater risk of
default.

© 2010 Standard & Poor’s Financial Communications. All
rights reserved.