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Creating a Retirement Paycheck: A Series on Retirement Income Planning

Whatever your retirement dreams are, they can still come true. It just depends on how you plan and manage your resources. On any trip, it helps to have an idea of ​​where you are going, how you plan to travel, and what you want to do when you get there.

If this sounds like a vacation, well, it should. Most people spend more time planning a vacation than something like retirement. And if you think of retirement as the next act in your life and approach it correctly, you won’t get bored so easily or run out of money to continue the journey or get lost and make poor financial decisions along the way.

What counts is how you manage it

How much you need really depends on the lifestyle you hope to have. And it is not necessarily true that your expenses decrease during retirement. Assuming you have an idea of ​​what your annual dollar expenses might be today, you now have a goal to aim for in your planning and investing.

Add up the income from sources you expect in retirement. This can include Social Security benefits (the system is solvent for at least 25 years), any pensions (if you’re lucky to have an employer-sponsored plan), and any income from jobs or that new career.

Donation Spending: Pretend You’re Like Harvard or Yale

Consider taking the same approach that keeps big organizations and donations going. They plan to be around for a long time, so they aim for a spending rate that allows the organization to sustain itself.

1.Calculate your gap: Take your budget, subtract the expected sources of income, and use the result as your goal for your withdrawals. Keep this number to no more than 4% -5% of your total investment portfolio.

two.Use a combined approachEach year, look to increase or decrease your withdrawals based on 90% of the previous year’s rate and 10% of the investment portfolio’s return. If it goes up, you get a raise. If investment values ​​go down, you need to tighten your belt. This works well in times of inflation to help you maintain your lifestyle.

3. Stay invested: You may be tempted to lease on the stock market. But despite the rollercoaster we’ve had, it is still prudent for a portion to be allocated to stocks. Considering that people live longer, you may want to use this general rule of thumb for your allocation to stocks: 128 minus your age. Regardless, you should keep at least 30% of your investment portfolio (not including safety net money) in stocks.

If you think the stock market is scary because it is prone to periods of wild swings, consider the risk inflation will have on your purchasing power. Historically, bonds and certificates of deposit alone do not keep pace with inflation. Only investments in equities have demonstrated this ability.

Objective: invest wisely. While asset allocation makes sense, you don’t have to be married to “buy and hold” and accept being bounced around like a yo-yo. Your main allocation can be supplemented with more tactical or defensive investments. And you can change the combination of actions to cushion the effects of the roller coaster. Consider including stocks in large companies that pay dividends. And add asset classes that are not tied to the ups and downs of the major market indices. These alternatives will change over time, but the defensive ring around its core must be reassessed from time to time to add things like raw materials (oil, agricultural products), producers of raw materials (mining companies), distribution companies (pipelines), convertible bonds and managed futures. .

Four.Invest for income: Don’t just rely on bonds that have their own set of risks compared to stocks. (Think about the risk of credit default or the impact of higher interest rates on the fixed income coupon of your bond.)

Mix your bond holdings to take advantage of the characteristics of different types of bonds. To guard against the negative impact of higher interest rates, consider corporate floating rate notes or a mutual fund that includes them. By adding high-yield bonds to the mix, you will also provide some protection against eventual higher interest rates. Although they are called junk bonds for a reason, they may not actually be as risky as other bonds. Add Treasury Inflation Protected Securities (TIPS) that are backed by the full faith and credit of the US government Add emerging country bonds. While there is currency risk, many of these countries do not have the same structural deficits or economic problems that the United States and developed countries have. Many learned the lessons of the debt crisis of the late 1990s and did not invest in the exotic bonds created by financial engineers on Wall Street.

Include dividend-paying stocks or stock mutual funds in your mix. Large foreign companies are a great source of dividends. Unlike the US, there are more companies in Europe that tend to pay dividends. And they pay monthly instead of quarterly like here in the US Balance this with hybrid investments like convertible bonds that pay interest and offer upward appreciation.

5. Build a safety netTo get a good night’s sleep, use a bucket approach by diving into the investment bucket to recharge the reserve that should have 2 years of near-cash investment spending – savings, tiered CDs, and fixed annuities.

Yes, I said annuities. This safety net is backed by three legs, so you’re not laying all your eggs in annuities, let alone a fixed-term annuity. For many, this may be a bad word. But the best way to get a good night’s sleep is to know that your “must-haves” are covered. You can get relatively low-cost fixed annuities without all the bells, whistles, and complexity of other types of annuities. (While tempting, you would tend to pass up the “bonus” annuities because of the long list of surrender charges.) You can stagger your terms (1 year, 2 years, 3 years, and 5 years) just like CDs. To minimize exposure to any one insurer, you should also consider spreading them out to more than one well-rated insurer.

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