18 Jul Growth without risk in retirement
Q. I’m retiring in two years and I’m 59. I know my money has to last for many more years but I’m nervous about stock exposure. How can I get growth without risking the whole thing?
— Getting closer
A. We’re glad you realize you will continue to need growth for your portfolio as you enter your retirement years.
The accumulation phase, believe it or not, is usually the easy part. Now with retirement looming in the very near future, the hard stuff begins – how to balance safety and growth with the assets you’ve accumulated in order to make your money last for the rest of your life, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.
Thanks to advances in medicine and technology, people are living longer than ever before, DeFelice said, and it’s not uncommon for someone retiring at 62 or even 65 to have to plan for 30-plus years of living expenses without the luxury of receiving their normal paycheck.
Traditional pension plans have all but disappeared, and no one knows what the state of Social Security will be in the years ahead.
With interest rates at historic lows, cash as an asset class is paying next to nothing and won’t even keep up with inflation if things don’t change, DeFelice said. And if rates do go higher, bond prices will take a hit.
So how does one find growth in retirement without taking on the risk of a stock market crash? In today’s market environment, this has become a tremendous challenge for both investors and advisors alike, he said.
Unfortunately, your question is impossible to answer without knowing all the details of your specific situation, DeFelice said.
“The only way to truly come up with a sound retirement income strategy is to complete a thorough analysis of your cash flow, living expenses, discretionary spending, income sources, assets, family needs, etc., as well your risk tolerance and any legacy planning you want to do,” he said.
That’s why you should consider a free money makeover with NJMoneyHelp.com. (Email us at moc.p1579631677leHye1579631677noMJN1579631677@ksA1579631677 for more information.)
But in the meantime, if you are concerned about stock market risk, there are some strategies you might consider, DeFelice said.
One popular retirement income strategy is the “bucket” approach.
“The basic concept here is that you divide your money into three different buckets,” he said.
Bucket 1 should be filled with the amount of your living expenses for the next one to two years, and kept in cash or money market accounts. You would simply spend down the cash in Bucket 1 as needed to pay your living expenses.
Bucket 2 should be invested in a basic income/growth portfolio consisting of intermediate/long term bonds, preferred stock, and/or high dividend, blue chip common stocks, laddered with a 3- to 10- or 15-year time horizon, he said.
“The second bucket’s primary purpose is to generate income to replenish the cash in Bucket 1 as it is spent down to pay for immediate living expenses,” DeFelice said.
Bucket 3 should be invested primarily in growth assets like common stock and corporate bonds for years 15-plus.
“Bucket 3 contains the entire growth component of your portfolio and has the longest time horizon to invest – and since you will not be touching this money for any short term cash needs, you should be able to sleep at night knowing that you can weather the inevitable market downturns when they occur,” DeFelice said.
The starting amounts invested in each bucket will obviously vary depending on your situation, and all three buckets should be monitored and rebalanced accordingly.
Another strategy that has become increasingly popular because of the decline of traditional pension plans is using variable annuities with income benefits as part of your retirement income strategy, DeFelice said.
“In simplest terms, investing a portion of your retirement assets into a variable annuity with living benefits will allow you to maintain stock market exposure and stay invested while transferring the risk of outliving your money to an insurance carrier,” he said.
This basically takes the “sequence of returns” risk out of the equation – i.e. having a 2008-09 stock market decline in the early years of retirement force you into a hole from which you cannot climb out.
DeFelice said the insurance carrier will guarantee you continue to get a paycheck for as long as you live even if your actual account balance declines to zero.
“However, annuities are complex products that do not come without certain restrictions, and the fees you pay for this protection are higher than normal investment expenses,” he said. “But in the right situation, they could be a useful tool to manage stock market risk in your overall strategy. ”
The bottom line? There is no single magic strategy that will work for everyone, and what works great for one investor may not work at all for the next, DeFelice said.
“You are fast approaching a major crossroads in your life, and after working hard your whole career it is imperative that you get this part right – or there may be some pretty dire consequences for your financial well-being down the road,” he said.
DeFelice recommends you sit down with an advisor who is qualified to complete a thorough assessment of your circumstances before employing any strategies. And the time to start this process is now, while you are still working, to give yourself time to evaluate and implement the options that will put you in the best possible position when it is finally time to call it quits.
Email your questions to moc.p1579631677leHye1579631677noMJN1579631677@ksA1579631677.
This post was first published in July 2016.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.