Retirement Income Planning and Management
Posted by admin on August 25, 2015
Orientation to investing depends on where you are in the lifecycle.
Your orientation towards investing will depend on where you are in your life-cycle. During your earning years, your focus needs to be on accumulation of assets. The emphasis at this stage is on investment risk and expected return. Most of your portfolio typically contains “at-risk” assets, like stocks and bonds, with a smaller part in cash. During retirement, the focus is on decumulation. The emphasis shifts to ensuring guaranteed, stable income for the remaining years of your life. More of your portfolio will contain safe, inflation-protected assets. The concept of investment risk applies only to those assets allocated for discretionary wealth (i.e. those assets not needed for a comfortable retirement).
The “risk / return” question is addressed in both types of portfolios but is more relevant to one’s living standard during the earning years.
Retirement Portfolio – Emphasis for non-discretionary assets is on “flooring”
In your retirement portfolio, the emphasis for your non-discretionary assets should be on “flooring.” A “floor” consists of stable, risk-free (or near-risk-free), inflation-adjusted assets or income that will be available every year of your life, in the amount and at the precise time when you need them.
Products typically comprising the floor:
- TIPS ladder: A series of Treasury Inflation-Protected Securities (Treasury bonds whose principal adjusts with inflation) that mature at different times throughout retirement, providing necessary cash in the year of maturity.
- Inflation-adjusted income annuities: An income annuity is a “private pension” that you purchase from an insurance company. In return for a lump sum, the company will pay you a monthly income, for as long as you live.
The floor fills in the gap that exists between Social Security and your remaining income needs.
Income Plan Approach
Your retirement portfolio should be totally income based, as opposed to spending based.
It should allow for variability in investment returns and inflation, but favor income distribution alternatives that only yield high confidence levels.
It should consider investable assets and inflation adjusted Social Security, commercial annuities and bond laddering.
A TIPS ladder would be composed of principal and interest (interest declines over time as bonds reach maturity). In some years, only interest will be paid because bonds don’t necessarily mature every year.
All TIPS will reach maturity at or before age 100. The annuity income will continue for as long as you live.