The Fundamentals of an Effective Retirement Income Plan*
While the challenges to creating sustainable retirement income are daunting, there are basic considerations that, if properly implemented, will strengthen any retirement income plan:
• Include stocks in your portfolio to help manage longevity risk. When you consider that you’re likely to need an income stream for 25 years or longer, it becomes clear that your goal should be to include stocks in your portfolio to help generate long-term returns that will keep pace with the rising cost of living. Please keep in mind that stocks are subject to market risk.
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• Ensure that your portfolio is properly diversified to reduce the effect of market swings when taking withdrawals during a bear market. A properly diversified portfolio should include bonds, cash, and alternative investments, as well as stocks. If your portfolio is structured to cushion the extremes of volatility that typically occur during a bear market, you’ll be less likely to experience “reverse dollar cost averaging.” Reverse dollar cost averaging occurs when you are forced to liquidate a greater amount of shares to produce the same amount of income — and it can shorten your nest egg’s lifespan. Remember that diversification does not assure a profit or protect against loss and it is possible to lose money.
• Select a withdrawal rate that can be sustained over a long period of time. Industry research suggests that an annual withdrawal rate of 6% or greater may not be sustainable over an extended period of retirement. For that reason, most retirees should target a withdrawal rate of no more than 4% to 5%.
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• Consider adding a guaranteed income component, such as an annuity, to your portfolio. Adding guaranteed income, or income that you cannot outlive, such as an annuity product that provides guaranteed income for life, can improve the odds that your portfolio will survive throughout retirement, and may allow you to allocate a greater proportion of your nest egg to stocks.
Now move beyond the fundamentals to see some tax diversification strategies. *Read the Retirement Income Plan from Putnam Investments by clicking below.
