Retirement Planning - The Income vs Growth Conundrum

By Chuck Gibson

 

As baby boomers begin en mass to the retirement door exits the retirement landscape is radically changed from previous the past the majority of employers took the responsibility of providing for and meeting the needs of retirees. As defined benefit plans have gone the way of the dinosaur and are virtually extinct and the advent of the 401(k), the retirement burden has fallen directly on the shoulders of the retirees. Unfortunately, most retirees are unprepared for taking on this task and will soon have to be making some very important decisions.

The general rule of thumb is that you should take less risk in your retirement years because you don't have the time (or income) to make up for large losses. But if you are like most people you will have to take some risk to insure your portfolio income stream and value keeps up with inflation. The downside of taking risk is potential sleepless nights and unrecoverable drops in your portfolio value.

Say you had a $600,000 portfolio at retirement and put it all in guaranteed fixed income investments (assume it earns 6%, the long-term average bond return). Your portfolio will generate a nice, steady income of $3000/month. You do all the right things at retirement and make the necessary changes to your lifestyle and adjust your budget to insure you can survive on $3000/month. The good news is that in 20 years, if you only withdraw your investment dividends to live on your portfolio will still be worth $600,000 and generating the original $3000/mo. Unfortunately, If inflation is a reasonable 3.5%/year over that period of time, the difficulty becomes your $3000 income stream would now be worth less than $1500/month and your portfolio worth only $300,000. What may have been a comfortable retirement at $3000/mo becomes unlivable when you only have half that amount. If you retirement lasts more than 20 years you can see the picture becomes even bleaker. If you decide to take some of the principle and increase your withdrawal amount to keep up with inflation rather than keep them steady at $3000/month you would run out of money in 17 years!

Ideally, if you are lucky enough to be one of the very few who can retire and live off their assets without having to take risk, the investment decisions ahead of you are relatively easy. If not, you are looking at ways to best replace the steady stream of income your paycheck gave you and have it last through your lifetime. How do you create a steady stream of income from your existing asset base but also insure it lasts your lifetime? Putting it all in fixed income investments will generate the steady stream of income but inflation will quickly erode your buying power. Adding too much risk to your portfolio could subject you to losses so great you could never recover. What the right portfolio mix (asset allocation) will determine the success of your retirement. Asset allocation/risk determination is the most important item to control throughout your investing life and will be determined by many variables that are unique to each retiree including but not limited to time horizon, age, cash flow needs, retirement nest egg etc. I recommend everyone meet with an investment advisor to assist you in its determination before your retirement is underway to help assure a happy, prosperous, and worry-free retirement.

Article Source: http://EzineArticles.com/?expert=Chuck_Gibson