Effective Income Strategy for Retirement

To keep your growth engine running, create an effective retirement income strategy. 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.

To learn more about retirement, check out our blog post Your Independence, Rising Medical Costs and Retirement.

How you invest within those parameters is the tricky part.

• 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.

Adopting an effective income strategy

Create a budget and test-drive it before you quit your day job. A little common sense is in order. Rather than stick to a rigid formula, lower your payout or skip the inflation adjustment when market conditions are against you. Take it up a notch when your investments are thriving.

Finally, keep in mind that the above advice is just a general guideline. Everyone’s situation is different. To find out what the best plan is for you, consult a professional.

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William Hayes

As an attorney in private practice in Los Angeles County, California William Hayes provides extensive estate and tax planning services to individuals and businesses in Los Angeles, Pasadena, Glendale, Burbank and surrounding communities. Attorney Hayes’ primary focus is to help clients avoid probate, protect their assets, and provide for the security of their loved ones with a well-crafted estate plan. He believes in giving each client the time needed to explain his or her needs and wishes and then dedicates his efforts toward making the client’s desires clear in their final estate plan.

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