Three Legged Stool Strategy

Generating income in retirement is one of the most common financial goals for retirees and soon to be retirees.  The good news is that there are a variety of ways to “recreate your paycheck”. Retirement income might be visualized using a “Three Legged Stool”.  The first two sources or legs of retirement income are generally social security and pensions (although fewer and fewer retirees are covered by a pension these days). The third leg for most retirees will come from personal investments (there is a potential fourth leg – part time work – but that’s for another day).  It is this leg of the stool, the investment leg, that requires preparation, planning and analysis. The most effective plan for you depends on your individual circumstances, but here are some common methods for your consideration:  

1. Dividends and Interest
2. 3 – 5 Year Income Cushion or Bucket
3. The Annuity Cushion
4. Systematic Withdrawal or Total Return Approach 

Dividends & Interest:

Usually a balanced portfolio is constructed so your investment income – dividends and interest – is sufficient to meet your living expenses.  Principal is used only for major discretionary capital purchases.  This method is used only when there is sufficient investment capital available to meet your income need after social security and pension, if any. 

3-5   Year Income Cushion or Bucket Approach:

This method might be appropriate when your investment portfolio is not large enough to generate sufficient dividends and interest. Preferably 5 (but no less than 3) years of your income shortfall is held in lower risk fixed income investments and are available as needed. The balance of the portfolio is usually invested in a balanced portfolio. The Income Cushion or Bucket is replenished periodically.  For example, if the stock market is up, liquidate sufficient stock to maintain the 3-5 year cushion. If stock market is down, draw on the fixed income cushion while you anticipate the market to recover.  If fixed income is exhausted, review your income requirements, which may lead to at least a temporary reduction in income. 

The Annuity Cushion

This method is very similar to the 3-5 year income cushion. A portion of the fixed income portfolio is placed into a fixed-period immediate annuity with at least a 5-year income stream.  This method might work well when a bridge is needed to a future income stream such as social security or pension. 

Systematic Withdrawal or Total Return Approach

Consider this method again if your portfolio does not generate sufficient interest and dividends to meet your income shortfall. Generally speaking, a balanced or equity-tilted portfolio in which the income shortfall (after interest income) is met at least partially from equity withdrawals.  Lastly, set a reasonably conservative systematic withdrawal rate, which studies suggest near 4% of the initial portfolio value adjusted annually for inflation. 

After helping retirees for the last 27 years create workable retirement income, we have found that many times one of the above methods (and even a combination) works in re-creating your paycheck in retirement.  The key is to provide a strong foundation – or in this case – a sturdy stool. 

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors.  Dividends are not guaranteed and must be authorized by the company’s board of directors.  There is an inverse relationship between interest rate movements and fixed income prices.  Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Retiring Comfortably

According to the Employee Benefit Research Institute the past few years saw a sharp decline in Americans’ confidence about their ability to obtain a financially comfortable retirement.  The 2011 Retirement Confidence Survey finds that the percentage of workers reporting they are not at all confident in a comfortable retirement has climbed to a new high of 27% (up from 22% in 2010 and a recent low of 10% in 2007).

If you believe you are behind in preparing for retirement there is no need to make the fundamental tenants like saving money and repeating the process over and over more complex. Here’s how to get started today:

1.  Remember your investment time horizon is the rest of your life . . .  and not your retirement date.  This means if you are 45 today and live to age 90, you have 45 years for your money to be working for you.
2. Ramp up retirement savings by contributing the maximum amount to your 401k plan; ($17,000 for 2012 and if you are over 50 the extra “catch-up” amount is $5500).  IRA and Roth IRA limits for 2012 are $6000 and the extra catch-up amount for those 50 and older is $1000.
3. Avoid speculative investments to try and make up for lost time or money.  If you don’t already have a financial plan to help guide you to a comfortable retirement make it a goal to call a financial planner today.   

It’s fair to say that retirement in the 21st century will be quite different than generations before. But that doesn’t mean you aren’t in control. By focusing on your own behavior, you do have the ability to create a map for your own future.

Please watch for our next post where we discuss generating income in retirement. 

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Surviving Storage Wars

I’ll have to admit that A&E’s Storage Wars amuses me. Don’t tell my husband. He’s the one that fills up our DVR with episode after episode. I’m not obsessed with eccentric teams of scavengers competing at storage locker auctions in the hopes of striking it big. I always grumble a little when my husband decides it’s time to catch up on his viewing, but this is mostly hot air and I end up sticking around to see what happens. 

Let’s be honest, there is something intriguing about bidding on a storage locker with very little information on the contents inside and then watching as the real-life treasure hunters tally up their booty. Needless to say, not everyone is a winner. 

I was discussing my guilty pleasure with a friend over lunch today and she mentioned that television’s Storage Wars inspired her uncle to try his luck at local storage auctions. Now auctions are a part of his weekend ritual (although he’s yet to take the plunge and buy one). 

I’m betting that her uncle wouldn’t have his Saturdays booked up if not inspired by the characters and story lines of reality TV. He says they are truly a sight to be seen. There are a ton of people there and you need to come with several thousand in cash to turn from spectator to participant ... something that’s probably happening more often thanks to cable tv. 

This got me thinking…crowded auctions can have a lot in common with “flavor of the month” investments. This week, people may be clamoring to participate in the Facebook IPO. In the late ‘90s, the tech boom spawned plenty of “get rich quick” investing stories. We all know the lessons of real estate investors that jumped in at the wrong time a few years ago. Have you noticed how the appreciating price of gold launched online companies, commercials, and kiosks in the mall? 

Following the crowds can be a threat to you as an investor whether bidding on storage lockers or trading on a stock exchange. When there is artificial demand in the game, a locker with an intrinsic value of $1,000 may double or triple in price. Markets may be bid up as well, which might result in investors overpaying for the fad of the day. 

If you’re new to the game, without a process or guidance, the threat of missing out may prompt you to act irrationally or follow the crowds. Luckily, unlike in Storage Wars, when it comes to investing you don’t have to bid blindly. And if you’re careful, you’ll never get stuck with a whole heap of something you didn’t mean to buy. Especially if you have a game plan (read: process) going in, or at least some professional help!

Any information is not a complete summary or statement of available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.  Past performance may not be indicative of future results.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Where Did It Go?

Do you find that you ever have too much month at the end of your money? Be honest, in the blink of an eye, extra money seems to vanish. For those still in their earnings years, one of the keys to accumulating wealth, thus achieving your financial objectives, is to stop the disappearing act. Transfer dollars from your monthly cash flow to your net worth statement by adding funds to your savings accounts, taxable investment accounts, and retirement accounts (such as employer sponsored 401k and 403b accounts) and IRA’s (Traditional or ROTH).  Another smart move is to use funds from your monthly cash flow to pay down debt … also improving your net worth statement.

Saving money and improving your overall financial position is easier said than done.  The truth is that saving money is more than simply a function of dollars and cents; it requires discipline and perseverance.  You may have heard the strategy of “paying yourself first”.  The most effective way to pay yourself first is to set up automatic savings programs.  The 401k (or other employer plan) is the best way to do this – but you can also establish similar automated savings plans with brokerage companies and financial institutions such as banks or credit unions.

Just as important, be intentional with your 2012 spending.  Rather than thinking in terms of a budget (which sounds a lot like dieting) – think about establishing a “spending plan” instead. Planning your expenses as best you can will help ensure that you spend money on the things that add value to your life and should help keep your money from mysteriously vanishing at the end of the month.

For a free resource to help track your cash flow email: Timothy.Wyman@CenterFinPlan.com

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Are You Missing the Retirement Savings Boat?

You might think you’re saving smart. Cash flow permitting, many responsible savers pick the default and  defer 100% of their annual retirement plan savings to a pre-tax retirement account (i.e. 401(k), 403(b)). For 2012, the maximum deferral to a 401(k) plan is $17,000, in addition to $5,500 in annual catch-up contributions for anyone 50 and older.  Although this helps to reduce the tax bite today,  when you retire, your retirement assets would be 100% taxable!  

When was the last time you reviewed your current retirement savings strategy? It makes sense to save into other types of investment accounts that should be incorporated into your overall retirement plan savings strategy. There are three main types of retirement investment accounts:

Tax-Free Investment Accounts

Pre-Retirement - Contributions to these accounts are made with after-tax dollars. Income generated pre-retirement within these accounts is not taxed (provided certain qualifications are made).

Post-Retirement – Upon retirement, income taken from these accounts for retirement income needs is tax-free. 

Taxable Investment Accounts

Pre-Retirement - Savings into these accounts are made with after-tax dollars.  The dollars do not grow tax-free.  Any income generated within the account (i.e. interest, dividends, capital gains, etc.) is taxable income each year.

Post-Retirement – Upon retirement, only gains are taxable (currently at favorable capital gains rates if securities/funds sold are held for more than one year).

Tax Deferred Investment Accounts

Pre-Retirement - Money goes in on a pre-tax basis.

Post-Retirement – Upon retirement money comes out 100% taxable.

How to get on board:  A real world example:

Max is 45 and feels that tax rates are going to be much higher in his retirement years than they are today.  In 2012 Max meets with his financial advisor.  Max feels comfortable allocating $17,000 annually from cash flow for retirement.  Max currently earns $100,000 per year. Max’s company offers him a 4% maximum matching contribution.  Meaning if Max defers 4% ($4,000) of his income his company will match him up to 4% or $4,000.   Rather than maxing out his 401(k) Max is considering the following:

401(k): $4,000 plus company match of $4,000 = $8,000 total to 401(k) plan – Max has utilized his full matching contribution offered by his employer.

Roth IRA: $5,000 contribution (Max’s income is under the beginning phase out amount for 2012 of $107,000 and can contribute to a Roth IRA).

Taxable Investment Account: $5,000

Permanent Life Insurance: $3,000 - Because Max is a single father and needs life insurance, he is allocating $3,000 to permanent life insurance that is conservatively managed (meaning it provides enough death benefit in the event he dies prematurely as well as cash value which can be used towards retirement on a tax favored basis).

By doing this Max is definitely utilizing various tools to meet his specific goals.  By diversifying his retirement savings today, he is creating a plan designed to help his retirement income be as tax efficient as possible.

To see a detailed list of the different types of investment accounts and their tax status you can review the link below provided by Keebler & Associates LLP:

http://www.keeblerandassociates.com/files/Tax%20Asset%20Buckets.pdf 

http://www.irs.gov

The investment profile is hypothetical and the decisions are presented only as examples and are not intended as investment advice.  Please consult your financial Advisor if you have questions about these examples and how they relate to your own financial situation.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisers of RJFS, we are not qualified to render advice on tax matters.  You should discuss tax matters

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Investment mentioned may not be suitable for all investors.