How to Generate Income in Retirement | Capital Blueprints

?

Throughout your career, the emphasis in retirement planning is on saving and investing. Once you retire, how do you make that pile of money last for 25 or 30 years? That?s a much bigger issue.

I had conventional wisdom mindset of saving and investing ? getting that ?number? as big as I could get it. I did all the financial model calculations online, had my adviser do it, to make sure I could hit my number. But as I?ve discussed on this newsletter before ? its less about the ?number? and more about INCOME.

How much income can your IRA produce for you?

My colleague sent me an article he saw on Bankrate.com last week. The article was title ?Designing a portfolio for retirement income.? In the article, they asked three financial planners how they would design a portfolio for a 70 year with a $500,000 account that would produce income with no other source than social security.

According to the Social Security Administration, the average monthly benefit for retired workers at the beginning of 2011 was $1,177, which turns out to be an annual income of $14,124.

Balancing income needs with reality

Ideally, retirees should never have to touch their principal. All income needs should be covered by income generated from the account, usually in the form of interest payments, dividends, and capital gains.

What happens if you need more than the portfolio can provide?

For the purpose of the article, the retiree has income needs totaling $50,000 per year.
That?s a problem. For their portfolio to fund their yearly income needs, minus the Social Security income, they would need to withdraw money at a rate of about 7 percent per year, which means they could come up short if they happen to live a long and healthy life.

According to a recent GAO Report, at a 7% drawdown there is less than 49% chance their retirement funds will last 30 years. So our hypothetical retiree has some major issues.

What do the experts propose as possible solutions?

CFA #1
Split the allocation between 9 different investments to protect against erosion of the funds balance but no offer of a real solution to our retirees income problem.

CFA #2
Split the allocation among 7 different investments with 70% of in fixed income, mainly bond funds and mutual funds. The remaining 30% in more aggressive equities to try to outperform inflation. He does acknowledge the higher risk of this strategy.

CFA #3
Diversify between 13 different investments and rebalance regularly to try to shave off some income but mostly to not lose capital. But make sure you don?t try to do this yourself, have a financial adviser do this for you.

Are any of these strategies wrong? Are any of them right? How would you know, they don?t.

Who knows for certain, but the bottom line for each of them is that generating even $35,000 per year from a $500,000 portfolio is hard to do. Plus, relying on the market to produce it for you without losing your shirt is even harder.

If you are between 35 and 55 and are starting to take a hard look at your retirement, how does this make you feel? This seems a whole lot more like gambling and wishing than knowing you will have enough income in retirement. Ready to work until you are 80? That?s okay if you want to do it, but not if you have to do it.

So what?s your number? No, not the account balance. What?s the amount of income you really feel you will need to have the retirement lifestyle you want and deserve? Now, how are you going to get there?

mardi gras 2012 the secret world of arrietty cee lo allen iverson jr smith chris anderson rondo suspended