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Retirement income planning: converting wealth to income

Investor Education in Your Community logoPerhaps the single surpassing challenge facing investors is to accumulate sufficient assets during their working years to sustain them during their retirement years – which may be 20 years or longer.

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Mark B. RobinsonBy Mark B. Robinson

Perhaps the single surpassing challenge facing investors is to accumulate sufficient assets during their working years to sustain them during their retirement years – which may be 20 years or longer.

There are numerous strategies and thousands of investment combinations that can be used to accumulate wealth. But when the accumulation phase ends and you need to begin converting your wealth to income, the number of generally-accepted strategies narrows.
Before deciding on your retirement income strategy, you need to answer a few critical questions:

   1. How much do I anticipate needing?
   2. Starting when?
   3. For how long? (It may be longer than you think!)
   4. What are my sources for income? (E.g., Social Security, IRAs, company retirement plan distribution, etc.)
   5. Do I wish to leave any to my family or charity?

Finding answers to questions 2 and 4 is relatively easy. Arriving at accurate answers for questions 1 and 3 is trickier. Several factors make these two questions especially difficult:

   1. Longevity: We tend to underestimate how long we will need retirement income.
   2. Rising costs: Inflation and the costs for goods and services.
   3. Market risk: An investment strategy that is too conservative may not provide sufficient long-term growth to sustain the purchasing power of your income during retirement.
   4. Excess withdrawals: Spending too much too early into your retirement increases the possibility that you will deplete your assets too early.

After considering the questions and factors outlined above, you need to determine your investment strategy or priority:

    * Income with minimal risk: If this is your strategy, a portfolio of staggered-maturity fixed-income securities (bonds, CDs, etc.) or a single premium immediate annuity may be appropriate. Though ideal for risk aversion and for creating a reliable income stream, both have drawbacks. The fixed-income portfolio poses the threat of an early depletion of your assets and, in the case of the annuity, the loss of control of your assets. Both have the potential risk of a loss in purchasing power.
    * Increasing income with growth potential: If this is your strategy, establishing a separate income pool composed of fixed-income securities and a separate growth pool composed of stock-oriented investments may be appropriate. This two-phase strategy calls for initially taking income and principal only from the income pool and allowing the stock-oriented pool to grow over a pre-determined number of years, e.g., 10 years. After the 10-year period, and with the income pool now depleted, you would begin drawing (or harvesting) income from the stock-oriented pool which hopefully has increased significantly in value over the 10-year period.

Identifying what your specific retirement and estate planning needs are before you retire is critical. This undertaking will require a combination of financial, legal and tax advice. Don't leave work without it.

Click here to sign up for a free, noncommercial investment education seminar.

This material is not intended to replace the advice of a qualified tax adviser, attorney, accountant and/or insurance adviser. You should consult with the appropriate professional before you make any financial commitment regarding the issues related to your situation. These projections and examples are hypothetical and do not reflect actual investment results and are not a guarantee of future results.


Mark B. Robinson is a presenter for the Investor Education in Your Community program, a series of nonprofit, non-commercial financial literacy seminars held at public libraries.

The Investor Education in Your Community program paid for placement of this article. Its views do not necessarily reflect those of WWJ Newsradio 950 or CBS Radio.

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