YOU Are the Biggest Threat to Your Retirement Plan
When the going gets tough in the market, people invested in stocks have the natural impulse to pull out to cut their losses. By using an income allocation plan instead, you can ride out downturns more confidently.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
People planning to retire often tell me their greatest fear is running out of money after they stop working. They have a valid concern, but the risk is not really about living too long.
Instead, the issue that could bring calamity is the risk of failing to consistently follow a reasonable retirement plan.
Keep on Track
After people create their retirement plans, the tough part for many is staying the course. That's true particularly when investment returns are volatile and negative. The natural reaction to that kind of market environment is to cut and run. But studies show that investors lose 1% or more on their returns when they are not in the market. This could mean five or more years in lost income.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
However, unlike the risk of market returns, which no amount of diversification can fully allay, you can control the “stay the course” risk. All it takes is a little adjustment in your retirement planning, based on a simple premise: Reduce the amount of your income that is subject to the market — or what we call "income volatility."
With preparation, you can reduce your income volatility during retirement by 50% or more. And, with the proper investment, you can get a 20% increase in income that lasts a lifetime.
You can achieve these results with an income allocation plan.
How Income Allocation Works
As I have written previously, income allocation's twin goals are to increase the amount of after-tax (spendable) income and to reduce income volatility (for more dependability).
Here’s an example for two new retirees age 70, and how income allocation compares with a traditional asset allocation plan in which all income comes from withdrawals from savings:
Investor A follows an asset allocation withdrawal strategy and invests 50% in the stock market and 50% in bonds. Her withdrawals are set to last for 25 years, assuming a blended long-term market return of 4.5%.
Investor B follows an income allocation strategy, using both withdrawals from savings and guaranteed lifetime income from income annuities. Some of her savings are used to purchase an immediate annuity with income starting at 70. She also uses a portion to buy deferred income starting at age 85. The balance is invested in a managed portfolio of stocks, bonds and cash, with withdrawals set to last for 15 years.
Unfortunately, soon after the start of the plan, a market meltdown occurs, just like in 2008-09. Investor A, with all her savings in an investment account with no guaranteed income, loses $180,000 in account value. Investor B loses $90,000, but still receives guaranteed income from her immediate annuity. She also has the peace of mind of knowing that income after age 85 is guaranteed for life. Further, Investor B has a managed withdrawal program that takes some of current year’s withdrawals from the cash account. (I am preparing a study on managed withdrawal strategies and will post it soon.)
Who is more likely to stay the course?
Investor B is not happy with the market machinations, but her income allocation plan reduced her income risk, so she sticks with her plan. Investor A is more likely to change course. She might sell during the downturn in hopes of stanching the losses, or she might reduce withdrawals — and her lifestyle — going forward.
Even the most expert adviser can’t protect against volatile markets. But when you consider all possible outcomes and create an income allocation plan as you prepare for retirement, you will be able to weather troubled times in the markets with confidence.
-
Nasdaq Leads a Rocky Risk-On Rally: Stock Market TodayAnother worrying bout of late-session weakness couldn't take down the main equity indexes on Wednesday.
-
Quiz: Do You Know How to Avoid the "Medigap Trap?"Quiz Test your basic knowledge of the "Medigap Trap" in our quick quiz.
-
5 Top Tax-Efficient Mutual Funds for Smarter InvestingMutual funds are many things, but "tax-friendly" usually isn't one of them. These are the exceptions.
-
Social Security Break-Even Math Is Helpful, But Don't Let It Dictate When You'll FileYour Social Security break-even age tells you how long you'd need to live for delaying to pay off, but shouldn't be the sole basis for deciding when to claim.
-
I'm an Opportunity Zone Pro: This Is How to Deliver Roth-Like Tax-Free Growth (Without Contribution Limits)Investors who combine Roth IRAs, the gold standard of tax-free savings, with qualified opportunity funds could enjoy decades of tax-free growth.
-
One of the Most Powerful Wealth-Building Moves a Woman Can Make: A Midcareer PivotIf it feels like you can't sustain what you're doing for the next 20 years, it's time for an honest look at what's draining you and what energizes you.
-
I'm a Wealth Adviser Obsessed With Mahjong: Here Are 8 Ways It Can Teach Us How to Manage Our MoneyThis increasingly popular Chinese game can teach us not only how to help manage our money but also how important it is to connect with other people.
-
Looking for a Financial Book That Won't Put Your Young Adult to Sleep? This One Makes 'Cents'"Wealth Your Way" by Cosmo DeStefano offers a highly accessible guide for young adults and their parents on building wealth through simple, consistent habits.
-
Global Uncertainty Has Investors Running Scared: This Is How Advisers Can Reassure ThemHow can advisers reassure clients nervous about their plans in an increasingly complex and rapidly changing world? This conversational framework provides the key.
-
I'm a Real Estate Investing Pro: This Is How to Use 1031 Exchanges to Scale Up Your Real Estate EmpireSmall rental properties can be excellent investments, but you can use 1031 exchanges to transition to commercial real estate for bigger wealth-building.
-
Should You Jump on the Roth Conversion Bandwagon? A Financial Adviser Weighs InRoth conversions are all the rage, but what works well for one household can cause financial strain for another. This is what you should consider before moving ahead.
