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Tax Planning & Preparation

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Retirement Read Time: 4 min

Retirement Income and the Traditional Portfolio

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 expected and potentially undermine the sustainability of your assets. So you may want to consider a couple of strategies to help manage this concern.

Liquid Assets

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.

Annuities

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 must integrate different retirement investment vehicles to 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,” Ibbotson’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 the "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.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

 

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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named representative, broker - dealer, state - or SEC - registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Check the background of your financial professional on FINRA's BrokerCheck.

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