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Thursday, June 09, 2011

O2 MoneyBoost | > Stretching your retirement income to last a lifetime

With economic uncertainty threatening long-term savings and retirement goals, people in or approaching retirement face greater financial challenges than ever. Here are some practical ways to develop your retirement income strategy and help manage risks to your retirement income.
Know the risks
Market volatility over the last several years has painfully demonstrated the challenges of creating and managing income in retirement for those who have accumulated savings in 401(k) plans and individual retirement accounts (IRAs). But investing too conservatively to avoid market fluctuations can expose retirees to additional risks, some of which are interdependent. And solving for one may exacerbate another. These risks include:



  • Longer life expectancies. People are living longer than ever, which means they need enough savings to last at least 20 to 30 years.
  • Rising health care expenses. According to the Employee Benefit Research Institute (EBRI), the average husband and wife turning 65 in 2010 will need about $250,000 in savings to pay health care expenses not covered by Medicare.*
  • Inflation. An average annual inflation rate of just 3% will double living costs in approximately 24 years. Most Americans can expect to live at least that long in retirement.
  • Withdrawal risk. Retirees risk exhausting their savings if they withdraw too much each year, particularly in the early years of retirement.
  • Unexpected events. A property loss, long-term illness or adult child moving back home can cause an unplanned increase in living costs.
Manage risk through a three-part diversification plan
You can maintain cash flow throughout your retirement and address the risks you may encounter with a three-part diversification plan. Here's how it works:
  • Time diversification. Divide your investment assets into three "buckets": (1) cash, (2) low-volatility short-term investments and (3) long-term growth and income investments. The first bucket provides easy access to money. The second bucket includes low-volatility investments that can generate higher yields than cash, making it possible to ride out market declines without selling long-term assets. This allows the third or "long-term" bucket to be invested more aggressively to generate growth and income to help offset the effects of inflation.
  • Product diversification. Combine products with different features so they can work together to protect your portfolio and create lasting income. A product diversification strategy may include a number of options, including:
    • Annuities for guaranteed income (keep in mind that annuity guarantees are based on the continued claims paying ability of the issuing company)   
    • Equity funds for ongoing growth
    • Insurance to protect against losses that can otherwise prematurely deplete a portfolio
    • Health care coverage to meet out-of-pocket medical costs
    • A home equity line of credit to help maintain cash flow
  • Tax diversification. Manage retirement distributions more tax efficiently by spreading your assets across investments with different tax treatments. A portfolio that is well diversified from a tax perspective might include a mix of:
Four steps to creating an income strategy
These four steps use time, product and tax diversification strategies to help you gain greater control over your retirement income so you can make it last.
Step 1: Identify your needs and income sources
Figure out how much monthly and annual income you'll need to meet your everyday expenses, fulfill your retirement dreams and achieve your legacy goals. Your financial advisor can help you estimate your retirement income expenses.
Then, list your payments from Social Security, pensions, annuities and other sources of regular income like dividends. Guaranteed income sources (such as annuities) can be used to cover some or all of your essential expenses. Then other assets can be invested more aggressively to achieve lifestyle and legacy goals.
Step 2: Diversify your investments in cash, short-term assets and long-term investments
First, establish a cash hub containing enough money to meet your income needs for at least a year. This is the account you'll use for your everyday expenses.
Then, purchase low-volatility, short-term investments worth about two years of your income needs. Short-term investments typically deliver higher yields than cash and can help you weather market declines without liquidating stocks or other long-term investments. Some short-term investments you may want to consider are:
Finally, you'll need long-term investments with higher return potential to offset inflation over the course of your retirement. This might include a diversified mix of stocks, bonds, mutual funds, fixed and variable annuities. It may also include:
An easy way to keep your investments on track is with advice-embedded solutions, which offer built-in asset allocation, risk management and rebalancing. These solutions provide integrated advice and professional portfolio management to help you make the most of your retirement savings in any market conditions. Talk to your advisor about advice-embedded solutions and what they can do for you.
Step 3: Protect your savings from the unexpected
Complete your retirement income strategy by implementing solutions that generate contingent cash flows to protect against the unexpected, so your remaining assets can continue to work toward your goals. These include a home equity line of credit you can tap for unforeseen emergency expenses, as well as insurance to protect against a variety of risks, such as a property loss or long-term care need.
Step 4: Review and adjust your strategy regularly
Keep your cash hub funded and rebalance your long-term investments to ensure they're in line with your risk tolerance and retirement goals. You can also help offset taxes by carefully considering which assets to draw down depending on market and personal circumstances.
Other things to keep in mind
It's never too early to start planning for retirement. Ask your Ameriprise financial advisor to help you develop a plan to grow your assets and manage risks so you can more confidently pursue your retirement dreams.
Key points
  • People in or approaching retirement face greater financial challenges than ever and may need to take steps to help ensure their income will last a lifetime.
  • Risks to retirement income can include longer life expectancies, health care expenses, inflation and unexpected events.
  • A three-part diversification plan, focused on time, product and tax diversification, can help you manage these risks.
  • Other strategies that can help include protection planning against a range of risks through insurance with the backing of a home equity line of credit for the unexpected.
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