Retirement Distribution Strategies

10 Feb

Balancing Your Investment Choices with Asset Allocation

Posted by: Brad Neve / Category: Investment Strategies, Retirement Distribution Strategies

A chocolate cake. Pasta. A pancake. They’re all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that’s right for you.

Getting the right mix

The combination of investments you choose can be as important as your specific investments. The mix of various asset classes, such as stocks, bonds, and cash equivalents, accounts for most of the ups and downs of a portfolio’s returns.There’s another reason to think about the mix of investments in your portfolio. Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may be chosen for their growth potential. Others may provide regular income. Still others may offer safety or simply serve as a temporary place to park your money. And some investments even try to fill more than one role. Because you probably have multiple needs and desires, you need some combination of investment types. Balancing how much of each you should include is one of your most important tasks as an investor. That balance between growth, income, and safety is called your asset allocation. It doesn’t guarantee a profit or insure against a loss, but it does help you manage the level and type of risks you face.

Balancing risk and return

Ideally, you should strive for an overall combination of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk. For example, let’s say you want to get a 7.5% return on your money. Your financial professional tells you that in the past, stock market returns have averaged about 10% annually, and bonds roughly 5%. One way to try to achieve your 7.5% return would be by choosing a 50-50 mix of stocks and bonds. It might not work out that way, of course. This is only a hypothetical illustration, not a real portfolio, and there’s no guarantee that either stocks or bonds will perform as they have in the past. But asset allocation gives you a place to start.

Someone living on a fixed income, whose priority is having a regular stream of money coming in, will probably need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that’s 30 years away. Many publications feature model investment portfolios that recommend generic asset allocations based on an investor’s age. These can help jump-start your thinking about how to divide up your investments. However, because they’re based on averages and hypothetical situations, they shouldn’t be seen as definitive. Your asset allocation is–or should be–as unique as you are. Even if two people are the same age and have similar incomes, they may have very different needs and goals. You should make sure your asset allocation is tailored to your individual circumstances.

Many ways to diversify

When financial professionals refer to asset allocation, they’re usually talking about overall classes: stocks, bonds, and cash or cash equivalents. However, there are others that also can be used to complement the major asset classes once you’ve got those basics covered. They include real estate and alternative investments such as hedge funds, private equity, metals, or collectibles. Because their returns don’t necessarily correlate closely with returns from major asset classes, they can provide additional diversification and balance in a portfolio. Even within an asset class, consider how your assets are allocated. For example, if you’re investing in stocks, you could allocate a certain amount to large-cap stocks and a different percentage to stocks of smaller companies. Or you might allocate based on geography, putting some money in U.S. stocks and some in foreign companies. Bond investments might be allocated by various maturities, with some money in bonds that mature quickly and some in longer-term bonds. Or you might favor tax-free bonds over taxable ones, depending on your tax status and the type of account in which the bonds are held.

Asset allocation strategies

There are various approaches to calculating an asset allocation that makes the most sense for you. The most popular approach is to look at what you’re investing for and how long you have to reach each goal. Those goals get balanced against your need for money to live on. The more secure your immediate income and the longer you have to achieve your investing goals, the more aggressively you might be able to invest for them. Your asset allocation might have a greater percentage of stocks than either bonds or cash, for example. Or you might be in the opposite situation. If you’re stretched financially and would have to tap your investments in an emergency, you’ll need to balance that fact against your longer-term goals. In addition to establishing an emergency fund, you may need to invest more conservatively than you might otherwise want to. Some investors believe in shifting their assets among asset classes based on which types of investments they expect will do well or poorly in the near term. However, this approach, called "market timing," is extremely difficult even for experienced investors. If you’re determined to try this, you should probably get some expert advice–and recognize that no one really knows where markets are headed. Some people try to match market returns with an overall "core" strategy for most of their portfolio. They then put a smaller portion in very targeted investments that may behave very differently from those in the core and provide greater overall diversification. These often are asset classes that an investor thinks could benefit from more active management.Just as you allocate your assets in an overall portfolio, you can also allocate assets for a specific goal. For example, you might have one asset allocation for retirement savings and another for college tuition bills. A retired professional with a conservative overall portfolio might still be comfortable investing more aggressively with money intended to be a grandchild’s inheritance. Someone who has taken the risk of starting a business might decide to be more conservative with his or her personal portfolio.

Things to think about

Don’t forget about the impact of inflation on your savings. As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate. Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.
Your asset allocation should balance your financial goals with your emotional needs. If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you’re pursuing is worth the lost sleep.
Your tax status might affect your asset allocation, though your decisions shouldn’t be based solely on tax concerns.

Even if your asset allocation was right for you when you chose it, it may not be right for you now. It should change as your circumstances do and as new ways to invest are introduced. A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too.

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31 Dec

Closing a Retirement Income Gap

Posted by: Brad Neve / Category: Retirement Distribution Strategies

When you determine how much income you’ll need in retirement, you may base your projection on the type of lifestyle you plan to have and when you want to retire. However, as you grow closer to retirement, you may discover that your income won’t be enough to meet your needs. If you find yourself in this situation, you’ll need to adopt a plan to bridge this projected income gap.

Delay retirement: 65 is just a number

One way of dealing with a projected income shortfall is to stay in the workforce longer than you had planned. This will allow you to continue supporting yourself with a salary rather than dipping into your retirement savings. Depending on your income, this could also increase your Social Security retirement benefit. You’ll also be able to delay taking your Social Security benefit or distributions from retirement accounts.

At normal retirement age (which varies, depending on the year you were born), you will receive your full Social Security retirement benefit. You can elect to receive your Social Security retirement benefit as early as age 62, but if you begin receiving your benefit before your normal retirement age, your benefit will be reduced. Conversely, if you delay retirement, you can increase your Social Security benefit.

Remember, too, that income from a job may affect the amount of Social Security retirement benefit you receive if you are under normal retirement age. Your benefit will be reduced by $1 for every $2 you earn over a certain earnings limit ($13,560 in 2008, up from $12,960 in 2007). But once you reach normal retirement age, you can earn as much as you want without affecting your Social Security retirement benefit.

Another advantage of delaying retirement is that you can continue to build tax-deferred funds in your IRA or employer-sponsored retirement plan. Keep in mind, though, that you may be required to start taking minimum distributions from your qualified retirement plan or traditional IRA once you reach age 70½, if you want to avoid harsh penalties.

And if you’re covered by a pension plan at work, you could also consider retiring and then seeking employment elsewhere. This way you can receive a salary and your pension benefit at the same time. Some employers, to avoid losing talented employees this way, are beginning to offer "phased retirement" programs that allow you to receive all or part of your pension benefit while you’re still working. Make sure you understand your pension plan options.

Spend less, save more

You may be able to deal with an income shortfall by adjusting your spending habits. If you’re still years away from retirement, you may be able to get by with a few minor changes. However, if retirement is just around the corner, you may need to drastically change your spending and saving habits. Saving even a little money can really add up if you do it consistently and earn a reasonable rate of return. Make permanent changes to your spending habits and you’ll find that your savings will last even longer. Start by preparing a budget to see where your money is going. Here are some suggested ways to stretch your retirement dollars:

· Refinance your home mortgage if interest rates have dropped since you took the loan.

· Reduce your housing expenses by moving to a less expensive home or apartment.

· Sell one of your cars if you have two. When your remaining car needs to be replaced, consider buying a used one.

· Access the equity in your home. Use the proceeds from a second mortgage or home equity line of credit to pay off higher-interest-rate debts.

· Transfer credit card balances from higher-interest cards to a low- or no-interest card, and then cancel the old accounts.

· Ask about insurance discounts and review your insurance needs (e.g., your need for life insurance may have lessened).

· Reduce discretionary expenses such as lunches and dinners out.

Earmark the money you save for retirement and invest it immediately. If you can take advantage of an IRA, 401(k), or other tax-deferred retirement plan, you should do so. Funds invested in a tax-deferred account will generally grow more rapidly than funds invested in a non-tax-deferred account.

Reallocate your assets: consider investing more aggressively

Some people make the mistake of investing too conservatively to achieve their retirement goals. That’s not surprising, because as you take on more risk, your potential for loss grows as well. But greater risk also generally entails greater reward. And with life expectancies rising and people retiring earlier, retirement funds need to last a long time.

That’s why if you are facing a projected income shortfall, you should consider shifting some of your assets to investments that have the potential to substantially outpace inflation. The amount of investment dollars you should keep in growth-oriented investments depends on your time horizon (how long you have to save) and your tolerance for risk. In general, the longer you have until retirement, the more aggressive you can afford to be. Still, if you are at or near retirement, you may want to keep some of your funds in growth-oriented investments, even if you decide to keep the bulk of your funds in more conservative, fixed-income investments. Get advice from a financial professional if you need help deciding how your assets should be allocated.

And remember, no matter how you decide to allocate your money, rebalance your portfolio now and again. Your needs will change over time, and so should your investment strategy.

Accept reality: lower your standard of living

If your projected income shortfall is severe enough or if you’re already close to retirement, you may realize that no matter what measures you take, you will not be able to afford the retirement lifestyle you’ve dreamed of. In other words, you will have to lower your expectations and accept a lower standard of living.

Fortunately, this may be easier to do than when you were younger. Although some expenses, like health care, generally increase in retirement, other expenses, like housing costs and automobile expenses, tend to decrease. And it’s likely that your days of paying college bills and growing-family expenses are over.

Once you are within a few years of retirement, you can prepare a realistic budget that will help you manage your money in retirement. Think long term: Retirees frequently get into budget trouble in the early years of retirement, when they are adjusting to their new lifestyles. Remember that when you are retired, every day is Saturday, so it’s easy to start overspending.

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13 Jun

Are You Setting Financial Goals?

Posted by: Ken Himmler / Category: Investment Strategies, Retirement Distribution Strategies

We all have moments where we daydream about our perfect retirement scenario. Some of us want to spend our golden years traveling the world and see for ourselves the wonders we hear about everyday on the news. Others want to have a nice retirement near the coastal waters and bask in the comforts of the warm, setting sun while enjoying the companionship of loved ones. Whatever your personal dream for the future may be, it is very important to consider the monetary requirements needed to realize your fantasies. It is essential that you develop a retirement plan.

One of the less talked about steps in creating the perfect retirement plan is the visualization process. In order to figure out how much money you are going to need in the future you will have to have at least a rough idea of what you want to aim for. In order for the visualization process to work, you have to spend some time honestly considering what you really want out of life. It is not necessarily important at this point to be realistic. Instead, try to realize that there is a lot of time between when you start making investments and when you actually retire. Once you have solidified your visualized desires you are ready to begin mapping out a retirement plan that will get you to your goal.

It is unrealistic to think that any investment strategy will work miracles over night because investments take time to fully mature. Sometimes the waiting can be painful for investors, so it is an extremely good idea to set smaller short-term financial goals. These smaller short-term goals will act as stepping-stones to your realized dream, and they can help you feel like you are actually making progress. They can also help you stick to your financial plan and adjust it as necessary. Both long-term and short-term financial goals are the keys to achieving your dreams.

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24 Aug

Trusts

Posted by: Ken Himmler / Category: Retirement Distribution Strategies

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What is a trust?

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A trust is a legal entity that is created when you transfer property to a trustee for the benefit of a third person. The trustee manages the property for the beneficiary in accordance with the terms and the instructions in the trust document. In legal terms, the trustee has legal ownership of the property, while the beneficiary has beneficial ownership.

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Creator of trust

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The person who creates the trust is called the grantor, settlor, donor, or trustor. The grantor usually decides what assets will be transferred to the trust, who the beneficiaries will be, what the terms and conditions of the trust will be, and who will be the trustee. The grantor may also be a trustee and/or a beneficiary. Moreover, a beneficiary can be a trustee. The only arrangement that will not work is if the sole trustee is also the sole beneficiary (the legal and beneficial interests are said to merge and the trust is therefore disregarded as a legal entity).

Saving for Your Retirement

Posted by: Ken Himmler / Category: Investment Strategies, Retirement Distribution Strategies

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Major considerations

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How much will you need in retirement?

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When do you plan to retire? What kind of lifestyle do you desire? How much do you have right now that you can count on for your retirement? What about Social Security; do you know what kind of benefits you can expect? These are all factors you will need to consider when you determine how much you need. To understand how they tie together, see Determining Your Retirement Income Needs.

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Know how much you have

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Take an honest look at your present net worth. If you’re like most people, you’ve got a long way to go before you can afford to retire. Knowing how much you currently have earmarked for retirement will assist you in saving for your retirement. See Net Worth.

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Implement a savings plan

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Take an honest look at your current spending. Just as in planning for other financial goals, you need to implement a savings plan. Think about establishing a long-term systematic savings plan to put aside funds for retirement. If you haven’t already done so, consider the benefits of establishing and sticking to a spending plan.

Business Succession Planning Buy-Sell Agreements

Posted by: Ken Himmler / Category: Investment Strategies, Retirement Distribution Strategies

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Summary:

A buy-sell agreement is a legally binding contract in which the owners of a business set forth the terms and conditions of a future sale or buy back of a departing owner’s share of the business. Specifically, buy-sells control when owners can sell their interests, who can buy an owner’s interest, and at what price.

Buy-sells can accomplish many objectives, but are primarily used to ensure the smooth continuation of a business after a potentially disruptive event, such as an owner’s retirement, incapacity, or death.

Also valuable estate planning tools, buy-sells can provide for the orderly succession of a family business, and for the liquidity needed for payment of a deceased owner’s estate settlement costs and taxes. Further, if structured properly, a buy-sell can establish the purchase price as the taxable value of an owner’s business interest, avoiding unexpected estate tax consequences at the owner’s death.

What is a buy-sell agreement?

Buy-sell agreements are very important planning tools that can accomplish many things for a business with two or more owners. Sometimes referred to as a prenuptial or premarital agreement among business owners, a business continuation agreement, a stock purchase agreement, or a buyout agreement, a buy-sell is a legally binding contract that establishes when, to whom, and at what price an owner, partner, or shareholder can sell his or her interest in a business.

Annuities for lifetime income

Posted by: Ken Himmler / Category: Investment Strategies, Retirement Distribution Strategies

In the past 25 years I have heard a lot of arguments for and against annuities. Most of the time it is about how the agents earn a lot of money. My opinion, so what – the end result is what is important. Where the bad rap comes in is when the insurance agent sell an annuity that should not be sold. This is like going to an auto dealership and the salesman trying to sell you a two seater Read more…

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