Retirement Income Planning

Taking withdrawals from a traditional portfolio exposes fixed-income investors to “sequence of returns” danger. In other words, experiencing negative returns early in retirement can deplete your portfolio more quickly than you planned and potentially undermine the sustainability of your assets. So you may want to consider a couple of strategies to help mitigate this concern.

The first is to have a pool of very liquid assets to fund two-to-three years of retirement spending; this may keep you from selling longer-term assets at an inopportune time. Through time, and depending upon market conditions, you may have the opportunity to replenish this cash reserve using gains from your retirement portfolio.

Another complementary strategy is to integrate annuities. This can help shift the risk of market volatility off your shoulders and onto the issuing insurance company.

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

Until retirement, portfolio optimization largely focuses on the blending of different asset classes in the appropriate measure to create optimal portfolios. But in retirement, investors can integrate different retirement investment vehicles to help enhance income and manage risk.

One of the industry’s leading thinkers, Ibbotson Associates, has done a great deal of research around this very idea.

In a landmark study, “Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit,” Ibottson’s research came to several key conclusions that hold important ramifications for meeting the retirement-income challenge.

One of the study’s conclusions was that the addition of a variable annuity with a guaranteed minimum withdrawal benefits retirement portfolios—replacing cash or fixed-income allocations. It increases total income while it decreases risk.”¹

A successful retirement is so much more than undertaking sound investment strategies. It also requires understanding "sequence of returns" danger and taking measures to mitigate the risk.

1. The Ibbotson study assumed the investor had a retirement income period of 25 years or longer. For an investor with a shorter horizon, the strategy may not be as beneficial. The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities are not guaranteed by the FDIC or any other government agency. Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions, and may be worth more or less than the original amount invested if the annuity is surrendered.

Are you looking for more ways to make more money but are already spending 40 hours a week at your regular job? Residual income could be the answer you're looking for! We're going to let you in on four ways you can create residual income. The best part is that these strategies, unlike other residual income methods, don't require a larger initial investment. Instead, we put together a few strategies that only require a small financial buy-in (or none at all) and the talents you already have!

1. Start Simple Investing

The idea of investing may bring to mind complicated transactions and brokers, but this doesn't have to be the case. You can start investing without a large amount of money or having any investing experience.

A simple place to start investing without much stock market knowledge is through bonds. You can buy bonds for as little as $25, and U.S. Treasury bonds have a history of being lower risk, even though they come with a lower return.

2. Make Your Hobby Work For You

Through freelancing, you can take a skill you already have and use it for more than just your hobby. Create a product or service that multiple people can pay for and use. For example, if you enjoy photography, you can take and edit stock photos to sell online. You can also do this with music, illustrations, motion graphics or still designs.

Someone has to create stock products – it might as well be you.

3. Create Engaging Content

Like making a hobby work for you, you can create content online that people engage with and pay to use. You may have to spend some time and effort creating the content people want to engage with, but the financial cost can be minimal.

There are many content avenues you can choose from, including a website you own, a blog you write, video content you publish, a podcast you broadcast, a book you write or even an online store.

4. Rent Your Property

You don't need a separate investment house to rent your property to people who need it. Through peer-to-peer rental companies, you may have more to offer than you realize. You can rent out your apartment while you're away for a weekend, offer just one room in your home, or rent out other belongings like your car, bike, or even your equipment like skis or a snowboard.

Try these methods of earning some residual income and keep working towards your future financial freedom.