Considerations for Retirement Income Planning
As retirement nears you may not want to convert all of your savings to fixed income or CDs. Even when you are at a retirement age and are starting to take withdrawals from your investments, it is still important to consider keeping a diversified portfolio. One of the reasons the Four Percent Rule (I explained this in my last column) actually helped, was the assumption that if your portfolio could grow by an average of 6 or 7% or more – then by withdrawing only 4% you still saw modest growth. Understanding that interest rates are currently low on fixed income investments and that your rates of return will fluctuate make it essential to revisit your portfolio allocations periodically.
Resist the desire to overspend during the good years. Market cycles could produce healthier returns during a good year, however, it is important that you do not view these better years as an opportunity to splurge. It is very easy to think, “I don’t want to limit myself to a 4% withdrawals, I can afford 10%,” during a good year. Investors who maintain discipline and self-control are more likely to achieve a better long-term result.
Stay the course during the bad years. Many investors benefit from setting up a “reservoir” for funding their withdrawals and bill payments during retirement. Market cycles are susceptible to bad times and those might be inopportune times to panic over income. Your personal plan needs to have a strategy in place for downturns. This is why we discuss risk tolerance as well as immediate needs with our clients. Investments are not meant to be handled on an emotional basis and therefore some advanced planning is required.
Remember to consider taxes. When calculating your retirement withdrawals you should always consider using the least taxing methods available to you. Coordinating the tax ramifications of where to take your distributions from can prove to be invaluable. Remember that when you withdraw money from your retirement plans you should first consider the tax impact. For example, money withdrawn from many traditional IRAs and company 401k plans can be subject to taxes.
Email me, Julia M. Carlson, your questions at financial.freedom@lpl.com or call 541-574-6464.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC
