Retirement Income Strategies
By Duane J Silbernagel
It never ceases to amaze me how people will literally save for a lifetime to allow them to retire, but then have no retirement income plan when they are retired. As humans, it’s natural to plan – we do it daily whether it’s conscious or not. The “morning routine” is a plan to prepare for the day. If the goal is buying a house, one doesn’t dig a big hole in the ground and throw $20 sporadically into it, then pull it all out once they’re ready to buy a house. You create an action plan with small, simple steps that lead you to the larger overall goal.
It shouldn’t come as a surprise that there should be a plan in place to utilize the funds you have saved so you can live off them in retirement. There are multiple planning strategies that one can implement but all should be based on your specific comfort level regarding the risks associated with your options.
First let me review some items to consider and then I will outline one retirement income strategy. Some items to consider when looking at using retirement savings to fund your new lifestyle:
Taxes – Understanding how taxes will affect your money will help you plan how much money your savings can realistically provide. Also, understanding how your Social Security benefit will be taxed is important to understand. Taxes change on an annual basis, so reviewing your distribution plan yearly is prudent.
Healthcare – Are you eligible for Medicare? Do you have a supplement? How do you plan to cover the current premiums and the potential for rising healthcare costs?
Required Minimum Distributions – Having capitalized on the tax deferral of specific retirement accounts through your working life, at age 70 ½ the government is going to start requiring you to pull funds out of certain accounts. This will have income and tax implications that will need to be planned for.
Distributions from accounts that are invested in securities can be tricky. The market decline of 2008 and 2009 put a lot of pressure on retiree’s investment portfolios. Living expenses generally do not contract, just because your investments do. So how do you position your assets to deliver your retirement income in a consistent manner?
The risks one faces in retirement are different than those faced by investors who are working and saving for retirement.
The approach that we’ll look at today is commonly called the “bucket strategy.” Simply put, we assign a bucket (one specific account) to a specific timeframe in retirement. Each bucket has an asset allocation that is associated given the appropriate timeframe. Funds that were set aside for this year will generally be in a more conservative portfolio than funds allocated for 20 years in the future.
Over time each bucket performance will move respective to that allocation’s performance in the market. Funds will be transferred into and out of each bucket as the timeframes for those buckets draw near.
Psychologically, this strategy has merits, as it segments retirement (as a hypothetical example) into buckets:
Each bucket potentially provides the returns that are needed to keep the next bucket solvent.
The risk involved with this strategy, as with any investment, is it is dependent on market performance. As with most financial decisions it is important to do your due diligence so you can understand the risks. Please keep in mind that investing in securities involves risk and the potential to lose money and there are no assurances the any strategy will be successful.
If you’d like to find out more about me, have an idea you’d like me to write about or would simply like to contact me visit my website: www.duane.wrfa.com.
Thank you for reading.
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Waddell & Reed does not provide legal or tax advice. Please consult with a professional regarding your personal situation.
Duane Silbernagel is a Financial Advisor in Lincoln City, Oregon offering securities through Waddell & Reed, Inc., Member FINRA and SIPC. Insurance products are offered through insurance companies with which Waddell & Reed has sales agreements. He can be reached at (541) 614-1322, via email at DSilbernagel@wradvisors.com.
Waddell & Reed is not affiliated with www.newslincolncounty.com website and is not responsible for any other content posted to this website.