Market Beat: Retirement income
A very important part of financial planning is planning for retirement and deciding how you’re going to manage the retirement income from your retirement accounts.
One common strategy is known as the 4% rule. The way the 4% rule works is that in your first year of retirement you withdraw 4% of your balance and each year you increase your income by the amount of inflation.
For example, if you have $1 million saved up at retirement, you’d take out $40,000 the first year and then add an inflation adjuster every year based on the Consumer Price Index. If you use that strategy you have a very good chance of not depleting your principal based on long term historical averages. The strategy also assumes that you have a balanced portfolio of stocks and bonds.
If your goal is to preserve your capital and live off the income that your portfolio produces, another way is to set up an income producing portfolio and live off the income stream.
If you have a portfolio of bonds you can depend on that income as long as none of the issues ever defaults. This can be a good way to produce consistent reliable income, but if we enter an inflationary period like we saw in the 1970’s and early 1980’s your purchasing power on a fixed income will decline due to inflationary factors.
Dividend paying stocks and stock funds can be used as well, however stock dividend income can vary, dividends can be reduced or eliminated by the corporation at any time.
Dividends can also be increased and strategies that are based on buying the stocks of companies that have good free cash flow and a history of dividend increases can be viable.
Another distribution strategy that can work for retirees who have adequate retirement savings is a flexible distribution plan. With a flexible plan, you can withdraw a set amount each year, then take more from stock market gains.
So, if you have a typical half bond and half stock portfolio, you’d take out a set amount like 4% per year, plus any gains from the stock investments. In years where the market had losses, you would have no distributions from that part of your portfolio, just the fixed amount.
Retirement income plans should be adjusted to meet an individual’s goals. Not all people have the same goals regarding income needs or preserving capital beyond their lifetime.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.