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Building a better retirement

Your goal is to ensure you have enough income to maintain a comfortable lifestyle, while protecting your assets. Your investment plan should begin with knowing how much guaranteed income you can rely on.

 

Your sources will most likely be:

  • Social Security – while you may be tempted to claim it as soon as you are eligible, usually at age 62, remember that you will receive reduced monthly benefits, as opposed to waiting until you reach full retirement age at 66 or 67.

  • Pension – these income sources are becoming rare, with fewer than 20% of American workers having a pension plan, according to the Department of Labor. If you are lucky enough to be among them, you should consider how you want to withdraw the money. If you take it as a lump sum, be sure to invest it carefully in a tax-deferred account. If you take it as a steady ‘paycheck’ in the form of an annuity, familiarize yourself with the terms of the payout.

  • 401(k) Retirement savings – resist tapping into your savings before you reach age 59 ½, as there will be a 10% penalty and income taxes. It’s better for you to use a rollover or keep the money in your company plan.

  • Savings interest - earnings on CDs and other savings instruments makes these a minor source of income at this point, but if rates rise they can provide better returns.  A word of caution: if you are planning to use your principal to cover future bills, you will need to limit yearly withdrawals to make your nest egg last for the rest of your life.

Are you ready to fund 30 years of retirement? That may very well happen, as today’s healthy 65-year-olds can live well into their 80s and 90s. If Social Security is your only income stream, you may not have enough money to cover your needs.

Investment Strategies For Seniors

Adding to your income flow

Taking your retirement assets beyond predictable and steady income-producers like savings and Social Security will require investing your money, which always comes with a level of risk. But are some strategies safer for seniors?  Experts say yes, and here are a few of their suggestions, along with pros and cons.

Annuities

An annuity is a type of contract with an insurance company. You give them an up-front amount of investment money, which you cannot get back. But in return they guarantee to pay you a set amount of income for a selected period of time. There are a number of options including whether to receive payments for a certain number of years or for the rest of your life, or whether to cover a spouse with a joint survivor annuity. Different types of plans include immediate income and deferred income annuities, or a fixed deferred annuity with a guaranteed lifetime withdrawal benefit. The payments you receive through an annuity will not change, no matter what happens in the stock market. However, should the market do remarkably well, the insurer usually reaps the benefits, not you (though there are some annuities whose payments are linked to market performance.) Also, inflation will impact the purchasing power of your payments over the years.

Systematic Withdrawal Plans

If you are not comfortable with the thought of being unable to get your money back, this type of plan is a more liquid option. You give a financial advisor an amount of up-front money, and he/she puts it into an investment account. You then instruct them as to how much money to pay you, and when – monthly, quarterly or annually. You maintain control of your money, and have access to it, but like all stock market investments, there is no guarantee as to whether your capital will be preserved or will grow.

Bonds

These options offer regular interest payments that generate a steady income stream. And aside from cash, US Treasury bonds are the safest investment you could make. Some bonds provide tax-free income. Basically, a bond is a loan that a the government and companies take to finance their projects. When you buy a bond you become the lender, and in return, you are paid interest while the money is being lent, and you get your entire loan repaid when the bond matures. The safer the bond, the lower the interest rate, and as a rule, stocks do better than bonds on returns. Since 1926, according to researcher Morningstar, returns on large stocks have averaged 10% per year; long-term government bonds have returned 5-6%.  In addition to less return, bonds’ fixed payments are susceptible to inflation. As a rule, when interest rates go down, bond prices go up, which gives you the opportunity to sell your bond before it matures and make money. Conversely, you can lose money if you sell a bond before it matures for less than you paid, or if the issuer defaults on their payments.

Stocks

ownership, which comes with all the risks and potential rewards that the market offers. Investing in the market for income can be tricky in your retirement years, and it’s probably best to stick with very stable companies that pay dividends. Many experts advise you use the “120 minus your age” rule, and invest the rest of your money in fixed income. So a 60-year-old would put 60% (120 – 60) into equities, and 40% into fixed income. A 70-year-old would put 50% in stocks, and so on. As you age, the portion that goes into riskier investments diminishes.

Real Estate Investment Trusts (REITs)

This could be the next-best-thing to being a landlord. REITs buy, sell and manage commercial and residential properties, and the shares you buy can pay high dividends, though they can also be a volatile investment.

 

Other options such as tapping into your home equity, purchasing rental properties, and even certain life insurance policies can also be welcome sources of income for retirees.

Advice is a valuable asset

Determining what you’ll need, and where to find it, can be daunting. Before you begin investing, it is critical to know the best asset mix for your goals and your financial profile. Talk to your advisor.

 

If you don’t have one, companies such as SmartAsset offer free tools that can match you with a financial expert in your area within minutes. Go Here and check out asset allocation tools such as the one offered by Morningstar. Sign up for their investing classroom program Here.