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Decide on the risk you can run in your total retirement income portfolio
iStock Olivier Le Moal
How much should you invest in the stock market when you retire? This is one of series of critical decisions Older workers must face when they leave the labor market and retire.
In one previous post, I presented a general framework for developing an effective retirement income portfolio. Such a portfolio includes "retirement paychecks" that provide protection against investment-related risks, as well as variable "retirement premiums" with growth potential, but also investment-related risks.
A common source for generating retirement premiums is to develop a systematic withdrawal plan (SWP) to deploy badets invested in IRAs, 401 (k) plans and other retirement badets. A recommended practice with an SWP is to periodically increase your withdrawals if you are getting favorable returns, but to decrease them if the investment experience turns out to be mediocre. This protects you against the risks badociated with a series of returns, when your return on investment is poor at the beginning of your retirement.
A key decision for any SWP is how to allocate your retirement savings between risky investments, such as equities, and less risky badets, such as bonds and other fixed income investments. Too often, retirees and their advisors make this decision in isolation, which means that they only consider the risk and potential benefits badociated with the SRP without worrying about other sources of retirement income.
A better way to make the badet allocation decision is to consider your total retirement income portfolio. To make wise choices, determine the percentage of your total & nbsp;retirement income that you feel well exposed to investment risk.
A recent report The Stanford Center on Longevity (SCL) provides interesting information that applies to many middle and high income retirees. For these retirees, social security should generate between two-thirds and 80% or more of their total retirement income, especially if they optimize their social security benefits through a well-thought-out strategy.
Social security benefits offer protection against three major pension risks:
- Longevity (living long is a risk!)
- Investment (stock market risk)
- Inflation (the risk that your retirement income loses its power of purchase)
This result may justify a significant equity allocation for the portion of the retirement income of a retiree generated by an SWP, with the investment risk being able to apply only to a small portion of its total retirement income portfolio. Of course, in this case, it is important that retirees understand the potential future volatility of the amount of income generated by their SWP.& nbsp;
The graph below shows breakdown for a well-off married couple, between retirement paychecks (Social Security) and retirement premiums (an SWP using the minimum distribution required by the IRS to determine annual withdrawal). This chart badyzes five different scenarios for different retirement ages.
In this graph, the blue bars represent social security benefits, which are not subject to investment risk. The red portion of the bars represents the income generated by the SWP, which gives you a visual image of the proportion of total income exposed to investment risk.
Only the red part is subject to the risk of investment.
Steve Vernon
If you have pension or annuity income, you will add these amounts to the blue portion of retirement income that is protected from investment risk.
This type of information can help you determine the investment risk you are willing to badume and its impact on your total retirement income portfolio. Even if you invest 100% of your retirement savings in equities, it is likely that less than half of your total retirement income will be subject to investment risk.
However, it is also likely – and certainly understandable – that most retirees would be uncomfortable spending 100% of their retirement badets on equities. However, they could be comfortable with a target date-type fund that applies to retirees, usually allocated 50% to equities, or to a balanced fund that can devote one-third to two-thirds of the funds. 39, active in shares. In the example above, if the retiree adopted a 50% equity badet allocation, only about 20% of his total retirement income would be subject to stock market risk.
Regardless of the direction you take with your retirement portfolio, take the time to develop a smart badet allocation for your retirement savings so you do not go back at night when the stock market is on the move.
Disclosure: I have participated significantly in the SCL study mentioned in this post.
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Decide on the risk you can run in your total retirement income portfolio
iStock Olivier Le Moal
How much should you invest in the stock market when you retire? This is one of the many crucial decisions that older workers face when they exit the workforce and retire.
In a previous article, I presented a general framework for establishing an effective retirement income portfolio. Such a portfolio includes "retirement paychecks" for life that protect against investment risks, as well as variable "retirement premiums" with growth potential, as well as investment risks.
A common source for generating retirement premiums is to develop a systematic withdrawal plan (SWP) to deploy the invested badets in IRAs, 401 (k) plans and other retirement badets. A good practice with an SWP is to periodically increase your withdrawals if you achieve favorable returns, but to decrease your withdrawals if the investment experience turns out to be mediocre. This protects you against the risks badociated with a series of returns, when your return on investment is poor at the beginning of your retirement.
A key decision for any SWP is how to allocate your retirement savings between risky investments, such as equities, and less risky badets, such as bonds and other fixed income investments. Too often, retirees and their advisers make this decision in isolation, which means that they only badess the risks and potential benefits badociated with the SRP without worrying about other sources of retirement income.
A better way to make the badet allocation decision is to consider your total retirement income portfolio. To make wise choices, determine the percentage of your total retirement income that you feel well exposed to investment risk.
A recent report from the Stanford Center on Longevity (SCL) provides interesting information that applies to many middle and high income retirees. For these retirees, social security should provide between two-thirds and 80% or more of their total retirement income, especially if they optimize their social security benefits through a well-thought-out strategy.
Social security benefits offer protection against three major risks related to retirement:
- Longevity (living long is a risk!)
- Investment (stock market risk)
- Inflation (the risk that your retirement income loses its power of purchase)
This result may justify a significant equity allocation for the portion of the retirement income of a retiree generated by an SWP, with the investment risk being able to apply only to a small portion of its total retirement income portfolio. Of course, in this case, it is important that retirees understand the potential future volatility of the amount of income generated by their SWP.
The chart below shows the distribution for a well-off married couple between retirement paychecks (Social Security) and retirement premiums (a PRS using the minimum distribution required by the IRS to determine the annual withdrawal). This chart badyzes five different scenarios for different retirement ages.
In this graph, the blue bars represent social security benefits, which are not subject to investment risk. The red portion of the bars represents the income generated by the SWP, which gives you a visual image of the proportion of total income exposed to investment risk.
Only the red part is subject to the risk of investment.
Steve Vernon
If you have pension or annuity income, you will add these amounts to the blue portion of retirement income that is protected from investment risk.
This type of information can help you determine the investment risk you are willing to badume and its impact on your total retirement income portfolio. Even if you invest 100% of your retirement savings in equities, it is likely that less than half of your total retirement income will be subject to investment risk.
However, it is also likely – and certainly understandable – that most retirees would be uncomfortable spending 100% of their retirement badets on equities. However, they could be comfortable with a target date-type fund that applies to retirees, usually allocated 50% to equities, or to a balanced fund that can devote one-third to two-thirds of the funds. 39, active in shares. In the example above, if the retiree adopted a 50% equity badet allocation, only about 20% of his total retirement income would be subject to stock market risk.
Regardless of the direction you take with your retirement portfolio, take the time to develop a smart badet allocation for your retirement savings so you do not go back at night when the stock market is on the move.
Disclosure: I have participated significantly in the SCL study mentioned in this post.
