ROAD OF RETIREMENT INCOME Series | OVERVIEW

Road of
Retirement

THE PROCESS OF MANAGING RETIREMENT INCOME
KIT: AT-A-GLANCE

The road of retirement should be paved with more than good intentions. Soon-to-be retirees should develop and follow a retirement income plan that balances current lifestyle with the long-term sustainability of the retirement portfolio.

Retirees and their advisors should thoughtfully establish a spending plan to balance the desire to maintain a consistent lifestyle with preserving assets for a retirement that could last 30 to 40 years.

The Road of Retirement series provides some best practices for accomplishing this balance.

• The Language of Retirement Income Planning

Transitioning retirees' financial planning from the savings or accumulation phase to the distribution phase takes on a language of its own. This article defines the "new" terminology that we use throughout the Road of Retirement series.

• Preserving Purchasing Power

Longer life expectancies can present a number of new challenges for retirement. One such challenge is the potential loss of purchasing power due to the eroding effects of inflation. This article can shed light on some of the preparations that may provide retirement portfolios with the ability to keep pace with inflation over the long term.

• Sequence of Returns & Reverse Dollar Cost Averaging

Historical average returns mean very little to a retirement portfolio undergoing the stress of systematic withdrawals. Understanding how a series of returns is realized can impact how a retirement plan should be structured. Here we discuss the impact a series of poor returns and the need to sell assets at inopportune times could have on  a retirement portfolio.

• Endowment Spending Policy

Implementing a policy that determines a retiree's annual spending amount can be difficult, especially during periods of high inflation or a bear market. Adopting an endowment spending policy may be an attractive alternative for many  retirement income plans. This article discusses the Endowment Spending Policy and the Lifestyle Spending Policy.

• Building a Cash Flow Reserve Ladder

Structuring a retirement savings portfolio using a cash flow reserve ladder is a technique that matches liquidity needs with investment horizons. A cash flow reserve is established to fund up to twenty-four months of spending. The balance of the portfolio is invested in a combination of fixed income and equity investments with longer-term investment horizons.

• The Value of Dividends in Retirement

Soon-to-be retirees should look past current yield when considering income alternatives for retirement. A globally-focused, high and growing dividend strategy may provide retirees with a growing dividend income stream and the opportunity for price appreciation with which to outpace inflation.

• Converting Savings into Monthly Spending

Using a defined process to convert retirement savings into a monthly spending should be the cornerstone of every retirement income plan. Balancing the desire to increase income from the portfolio without foregoing the potential for price appreciation takes planning.


HOW TO ORDER

To order The Process of Managing Retirement Income kits go to www.Thornburg.com/RoadOfRetirement. The individual articles in this series are also available for downloading from the same web site.

Following these strategies does not assure or guarantee sustainability of a retirement portfolio or better performance, nor do they protect against investment losses.

The views expressed in these articles are subject to change.

Let us get you started on your Retirement Planning Today!
Online at our website: www.LamonAndStern.com
Call us at 770-951-8411

ROAD OF RETIREMENT INCOME Series | PART 7 of 7

Use a globally diversified portfolio
that generates enough income
to cover the current spending
needs without having to sell assets.

CONVERTING SAVINGS INTO MONTHLY SPENDING
PART 7 of 7 Series:
THE ROAD OF RETIREMENT
The Process of Managing Retirement Income

Retiring baby-boomers, who can expect to spend 30 to 40 years in retirement, will likely need a framework for converting their savings into a sustainable monthly income stream. Investors who are on the road of retirement all share some common fears including spending too much, principal loss from market volatility, loss of purchasing power due to inflation, and the biggest fear of all, running out of money.

As we have all experienced over the past few years, retirement plans designed to fund annual spending solely through the sale of the assets are exposed to the vagaries of the market.

We will outline how to convert the retirement savings to a monthly spending amount, using an approach that balances the need for current income and future growth.

The objective of this conversion process is to utilize the strategies outlined in this series to build the framework that may help a retiree sustain a lengthy retirement time frame. This process will use a globally diversified portfolio with a cash flow reserve ladder structure that strives to generate an attractive level of current income with the possibility for growth.

Cash Flow Reserve Ladder

This ladder provides three rungs aligning the most liquid investments to fund near-term spending needs, while the more volatile, growth-oriented investments are held inside a diversified portfolio with a five-year investment horizon.

Using a cash flow ladder, the retiree writes a check each month from the money market fund within the cash flow reserve and deposits it into their checking account. Providing a specified amount each month is a key attribute of the structure while also giving the retiree some separation from the larger pool of assets in the investment portfolio. This separation can help reduce the desire to overspend.

Within the various levels of investments from the cash flow reserve and investment portfolios, the interest and dividend income generated will not initially be re-invested. Instead this income will be deposited into the money market fund to continually replenish the cash flow reserve. However, if the income stream grows adequately enough to cover the spending amount and more, the excess is reinvested in the investment portfolio. The concept is to use a globally diversified portfolio that generates enough income to cover the current spending needs without having to sell assets. However, whatever portion of the spending is not covered by the current income will come from selling assets opportunistically into the market to refill the cash flow reserve back to the two-year spending level.

Using a Globally Diversified Asset Allocation

Given the opportunities globally to invest in companies that have the ability and willingness to pay a high and growing dividend, the equity portion of the retirement portfolio will be allocated to these types of income investments. The balance of the portfolio will be allocated into municipal bond investments to help preserve capital, offer some diversification and provide a tax-efficient interest income stream.

• The cash flow reserve portion of the portfolio represents approximately two years'  worth of spending and is equally divided between a short-term municipal bond fund and a municipal money market account. A short-term municipal bond fund is used since it may provide a higher income stream with a historically limited level of  volatility. The cash flow reserve receives income generated from the various  investments and is also the source from which the monthly spending check is written by the retiree for deposit into their checking account.
• Within the investment portfolio there is an additional 25% or approximately four to five years of spending allocated to intermediate-term (10-year) municipal bonds, which can be liquidated if there is a protracted decline in the equity markets. These municipal bond investments can help provide a more tax-efficient income stream and some good diversification benefits to the growing dividend stock strategy. Although the income from municipal bond investments is exempt from regular federal and state income tax  they may be subject to the alternative minimum tax (AMT).

In terms of income expectations from the municipal bond investments, while the current level of income may be relatively attractive, they are not geared to grow. A common flaw of retirement portfolios is an over-allocation to fixed income investments, leaving the portfolio highly susceptible to the loss of purchasing power.

Using a global approach to investing in companies that provide growing dividends allows an opportunity to improve portfolio diversification by industry, sector, and country.
Using the Cash Flow Reserve Ladder, with its focus on maintaining two years of liquidity in the reserve, together with an allocation to municipal bonds, allows a portfolio to benefit from the growing dividend income stream while also alleviating the need to sell these more volatile equity investments at inopportune times.

Best Practices

A structured process for converting hard-earned retirement savings into a monthly spending amount should be attractive to the majority of baby-boomers looking to retain control of their assets in retirement. Three to five years before your planned retirement date, begin investing in a well managed globally diversified portfolio of high and growing dividend stocks.

One of the best ways to increase the potential for a higher dividend income stream at the time of retirement is to get a head start.


Reinvest the growing dividend income that's generated before the retirement begins, thereby buying more shares and increasing the level of dividend income available when retirement distributions finally do begin. And remember to revisit the retirement plan annually with your financial advisor.

Let us get you started!
Online at our website: www.LamonAndStern.com
Call us at 770-951-8411

 --------------------------------------------------------------------------------------------------

Disclosures:
Following these strategies does not assure or guarantee sustainability of a retirement portfolio or better performance, nor do they protect against investment losses.

Investments in stocks and bonds are not FDIC insured, nor are they deposits of or guaranteed by a bank or any other entity.

Investments in a money market are not FDIC insured, nor are they deposits of or guaranteed by a bank or any other entity. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

Investing outside the United States, especially in emerging markets, entails special risks, such as currency fluctuations, illiquidity, and volatility.

Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.

ROAD OF RETIREMENT INCOME Series | PART 6 of 7

Use an active investment
management team that chooses
investment opportunities based
upon fundamental research

THE VALUE OF DIVIDENDS IN RETIREMENT
PART 6 of 7 Series:
THE ROAD OF RETIREMENT
The Process of Managing Retirement Income


Over the past eighty-three years, dividends have accounted for approximately 40% of the total return for the S&P 500 Index. The importance of dividends has been an often overlooked part of investing, but will continue to come to the forefront as baby-boomers prepare for retirement and look for high and growing income generating investments.

There are generally two schools of thought regarding how best to fund expenses in retirement. There are many who believe a total return approach is optimal, whereby an asset allocation and total return is targeted for the portfolio and a portion of the retirement assets is sold periodically to cover expenses. While this approach attempts to provide the growth that retirees need to outpace the effects of inflation, they may also be forced to sell assets at an inopportune time.

A cow for her milk. A hen for her eggs,
And a stock, by heck, for her dividends.
An orchard for fruit. Bees for their honey,
And stocks, besides, for their dividends.

                John Burr Williams,
                "Evaluation of the Rule of Present Worth," 1937

The second school of thought follows a high income approach, whereby the portfolio is comprised of high yielding income investments in an attempt to generate sufficient current income to cover expenses. This approach can leave a retiree too heavily exposed to fixed income expenses and the ravages of inflation.

We will explore a third approach, which is a hybrid of the total return and high-income approaches. We will explore how an investment in stocks of companies that provide both high and growing dividend income can benefit a retirement portfolio undergoing the duress of withdrawals. This type of investment strategy can have the potential to provide a growing dividend income stream as well as capital appreciation needed by retirees.

Understanding Yield

When reviewing income generating alternatives, retirees often focus on current yield (the current income divided by the current price). This works well for fixed income investments, which are, essentially, contracts that pay a certain level of income to the bond holder each year and then return the principal amount at maturity. However, for equity investments, where both the income and stock price may appreciate, looking solely at current yield can disguise the growth in the actual dollar amount of the income generated.

Not only can growing dividends help contribute to the retiree's distributions, but the portfolio value may also have the ability to outpace inflation through price appreciation.

Dividend Income in Retirement

For most retirees, developing a growing dividend income stream should be an attractive alternative to the total return or high income approaches described earlier. Having the retirement portfolio generate sufficient income to cover expenses while the portfolio is poised with an opportunity for continued growth should be a goal for every retiree.

Best Practices

Before implementing a dividend grower strategy, there are two improvements that should enhance the portfolio's diversification and selection of attractive dividend opportunities. First, looking for companies around the globe that offer both a high and growing dividend, versus limiting the investment universe to just domestic stocks, may improve results.

Another benefit from using a global approach is the opportunity to improve the portfolio diversification by in by industry sector. In the United States where attractive dividends are typically concentrated in real estate and utilities. Outside the United States, dividend opportunities exist in a multitude of sectors.

The second improvement when implementing this dividend growers strategy would be to use an active investment management team that chooses investment opportunities based upon fundamental research. The decline of dividends for U.S. companies in the S&P 500 Index during 2008-09 has made the headlines recently, and even the Dividend Growers were not immune. It is important to use an active manager who can analyze both a company's willingness and ability to pay a high and growing dividend as a way to try and navigate around some of the dividend declines seen in the broader market.

As the baby boomer generation progresses on the road of retirement, a dividend grower strategy may be prudent addition to their equity portfolios, as part of a core investment strategy. Not only can growing dividends help contribute to the retiree's distributions, but the portfolio value may also have the ability to outpace inflation through price appreciation.

Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.
The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.


Let us get you started!
Online at our website: www.LamonAndStern.com
Call us at 770-951-8411

ROAD OF RETIREMENT INCOME Series | PART 5 of 7

Quickly liquidate assets
into potentially more
favorable investment markets.

BUILDING A CASH FLOW RESERVE LADDER
PART 5 of 7 Series:
THE ROAD OF RETIREMENT
The Process of Managing Retirement Income

One of the challenges that confronts retirees and their advisors is how to prevent having to sell their hard earned retirement assets at the wrong time. 

We have all heard the age old investment adage "Buy Low and Sell High," which tells us to buy assets when they are out of favor but to time the disposition of the assets when the markets are in your favor.

This timing is even more important for retirees since they are liquidating assets to support expenses and not reinvesting. Therefore, one goal for each retiree and their advisor is how to prevent being in a position of having to sell their retirement assets for less than their potential worth.

When structuring a retirement investment portfolio, there are two tenets that can be followed which may help achieve this goal.

• The first is to invest the retirement savings in a well-diversified portfolio that includes cash, fixed income, and equity investments. Preferably, the equity investment allocation should focus on providing a high and growing dividend income stream. 
• The second is to implement a Cash Flow Reserve (CFR) Ladder that can provide monthly income during retirement and can allow the retiree and their advisor the ability to dictate when to sell assets into the market. 

Historically, fixed income and equity assets have had a tendency to be favorably priced at different times in the market, giving the retiree the ability to time the disposition of the retirement assets when it may be most optimal. Using a ladder structure that includes a cash flow reserve for near-term expenses, and both fixed income and equity assets for intermediate and longer-term expenses, is one structure that may help achieve this goal.

The consequences of not being diversified and then forced to sell into a bear market can be significant.
Structuring a Cash Flow Reserve Ladder

A Cash Flow Reserve Ladder is comprised of three "rungs" that strive to align the least volatile assets to meet the retiree's near-term expenses while giving equity assets the opportunity to grow. This potential growth of the equity investments is intended to offset the eroding effects of inflation on the retirement savings.

Checking Account

On the first of each month, the retiree writes a check from the cash flow reserve and deposits it into the checking account to pay for expenses. This provides a monthly cash flow, which from a behavioral finance perspective is very healthy and allows the retiree to budget for monthly spending accordingly.

Cash Flow Reserve
The cash flow reserve is comprised of two years' worth of spending needs in short-term assets such as a money market account and possibly a limited-term bond fund. The retiree draws a check from the cash flow reserve to deposit into the checking account at the beginning of each month. The relative liquidity of this rung can provide the retiree with the ability to cover two years of spending. Having two years' worth of disposable assets can be key to helping alleviate ill-timed selling into a bear market. At the end of each year, or as the market dictates, the advisor will sell either fixed income or equities from the investment portfolio to refill the cash flow reserve to cover the next two years of expenses.

Investment Portfolio

Fixed income investments have historically performed better when equities are out of favor; therefore, having a balanced portfolio of fixed income and equity investments can help alleviate selling retirement assets at a less opportune time in order to fund retirement spending. In this rung of the ladder, there will typically be enough fixed income investments to pay for an additional four to five years of spending. Also included in this rung is an allocation to equity investments, which have historically been more volatile than fixed income assets but also provide the potential for higher returns over time. While the equity investments may provide the necessary growth to help offset the eroding effects of inflation in retirement, retirees also need to have the flexibility to sell assets when the markets are attractively valuing those investments. The assets from this rung are used to replenish the funds in the cash flow reserve as needed. Again, the goal is to have the flexibility to sell either the equity or the fixed income assets at an opportune time.

Asset Allocation Alternatives
Now that we know the basic structure and operation of a Cash Flow Reserve Ladder, let's discuss just a few of the many ideas for how the retirement assets can be allocated to each rung. The most appropriate investments will vary depending on an individual's needs and investment objectives and should be discussed with a financial advisor.


Retirement Investment Portfolio
CASH FLOW RESERVE LADDER + WELL-DIVERSIFIED RETIREMENT PORTFOLIO

The Cash Flow Reserve Ladder approach allows the retiree and advisor time to liquidate assets into potentially more favorable markets.

Using a high and growing dividend-paying stock fund in this rung may provide the double benefits of a growing dividend stream to contribute to the current income needs of the retiree and the potential growth that is historically associated with equity investments.

Utilizing the structure of a Cash Flow Reserve Ladder with a well-diversified retirement portfolio during the distribution phase of retirement can provide retirees with the necessary foundation and discipline to alleviate selling their retirement assets into a bear market. The cash flow reserve has the ability to provide two years of liquidity, thus allowing expenses to be met readily. The investment portfolio has a mix of intermediate-term fixed income and equities focusing on a high and growing dividend income stream that may be liquidated during opportune times in the market to refill the cash flow reserve. Hopefully, this type of structure can help the retiree stay on plan and meet expenses.

If you would like us to mail you the information KIT with a FREE CD discussing the ins and outs of managing your retirement income please contact us today.
Review it online here: www.Thornburg.com

Let us get you started!
Online at our website: www.LamonAndStern.com
Call us at 770-951-8411

 --------------------------------------------------------------------------------------------------

Disclosures:

Following this strategy does not assure or guarantee sustainability of a retirement portfolio, better performance, or protect against investment losses.

Investments in a money market are not FDIC insured, nor are they deposits of or guaranteed by a bank or any other entity. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

Rebalancing - refilling the money market fund with an allocation from the equity account at the beginning of each year, except in 2009, when the decision was made not to replenish and ride through the turbulent equity and fixed income market. No further rebalancing was necessary.
 
Monthly Cash Flow - monthly check withdrawn from Cash Flow Reserve and assumed placed into checking account at the beginning of each month.

The Consumer Price Index (CPI) measures prices of a fixed basket of goods bought by a typical consumer, including food, transportation, shelter, utilities, clothing, medical care, entertainment and other items. The CPI, published by the Bureau of Labor Statistics in the Department of Labor, is based at 100 in 1982 and is released monthly. It is widely used as a cost-of-living benchmark to adjust Social Security payments and other payment schedules, union contracts and tax brackets. Also known as the cost-of-living index.

The S&P 500 Index is an unmanaged broad measure of the U.S. stock market.

ROAD OF RETIREMENT INCOME Series | PART 4 of 7

A decrease in the spending
amount during an extended
bear market is vital for improving
the sustainability of a
retirement portfolio.

ENDOWMENT SPENDING POLICY
PART 4 of 7 Series:
THE ROAD OF RETIREMENT
The Process of Managing Retirement Income

Retirees and their advisors should thoughtfully establish a spending plan to balance the desire to maintain a consistent lifestyle with preserving assets for a retirement that could last 30 to 40 years. 

To achieve this balance, a spending policy should be developed to determine what percentage of the retirement savings will be spent initially and how this amount will change over time to reflect the effects of inflation and the performance of the underlying investment portfolio.

A spending amount is defined as the amount of money withdrawn from the retirement savings to cover expenses. All too often they increase this amount annually by a cost of living adjustment as measured by the Consumer Price Index (CPI). This spending policy is referred to as a "lifestyle" policy since it is intended to provide for a consistent standard of living indexed to inflation.

The lifestyle spending policy, although attractive due to its simplicity, is flawed in two important areas.

   1. This policy does not tie the spending level to the performance of the underlying investment portfolio. As a result, the lifestyle policy never requires the retiree to slow or reduce the spending level during an extended bear market.

   2. In periods of high inflation, spending amounts may increase too rapidly, placing a retirement portfolio at risk of premature depletion.

Blended Approach Retirement Portfolio
DECREASE SPENDING DURING AN EXTENDED BEAR MARKET


Another policy is a blended approach, meaning it uses a percentage of the prior year's spending amount together with a percentage based upon the current portfolio value. When blended together; these two values determine the next year's spending amount. Having a percentage of the spending tied to the performance of the portfolio will increase or decrease the spending amount in tandem with the value of the retirement assets. A decrease in the spending amount during an extended bear market is a vital concept for improving the sustainability of a retirement portfolio.

Endowment Policy Retirement Portfolio
DECREASE SPENDING DURING AN EXTENDED BEAR MARKET GRADUALLY


While the endowment policy is designed to lower the spending amount during a bear market, it does so on a gradual basis, thereby allowing the retiree time to adjust spending and stay on plan. Like the university endowments that use a similar policy, it can provide a balance between funding current operations while also preserving assets to cover future operations.

To begin using an endowment policy, retirees and their advisors must decide on two factors: what spending rate is appropriate and what smoothing rule should be applied, described as follows.

• Spending Rate is the percentage of the portfolio value the retiree will use to determine their annual spending.

• Smoothing Rule determines how quickly to increase or reduce the retiree's annual spending amounts based upon the portfolio's investment performance. Selecting a 90/10 smoothing rule assumes that 90% of the spending amount will be based on the prior year's spending and the 10% will be based upon the portfolio's current valuation.

If you would like us to mail you the information KIT with a FREE CD discussing the ins and outs of managing your retirement income please contact us today.
Review it online here: www.Thornburg.com

Let us get you started!
Online at our website: www.LamonAndStern.com
Call us at 770-951-8411

 --------------------------------------------------------------------------------------------------

Disclosures:


When using the endowment policy, retirees and their advisors can expect that spending amounts may not keep pace with the cost of living, unless the performance of the underlying investment portfolio grows sufficiently to support it. This slow "tightening of the belt" during bear markets is one of the keys to a sustainable retirement portfolio.


Following this strategy does not assure or guarantee sustainability of a retirement portfolio or better performance nor do they protect against investment losses.


Investments carry risks, including possible loss of principal. Investments in equity securities are subject to additional risks, such as greater market fluctuations. Bonds are subject to certain risks, including interest-rate risk, credit risk, and inflation risk. The principal value of bonds will fluctuate relative to changes in interest rates, decreasing when interest rates rise. Investments in stocks and bonds are not FDIC insured, nor are they deposits of or guaranteed by a bank or any other entity.


The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.


Before investing, carefully consider the investment goals, risks, charges, and expenses. For a prospectus containing this and other information, contact your financial advisor. Read it carefully before investing.

ROAD OF RETIREMENT INCOME Series | PART 3 of 7

Alleviate reverse dollar
cost averaging with a
trusted retirement advisor.

SEQUENCE OF RETURNS &
REVERSE DOLLAR COST AVERAGING
PART 3 of 7 Series:
THE ROAD OF RETIREMENT
The Process of Managing Retirement Income

The effect on a retirement portfolio under the stress of systematic withdrawals can be quite dramatic.

Sequence of returns is simply the order in which returns are realized by a retiree. The consequences of a bad sequence of returns, especially early in retirement, can mean premature depletion of the portfolio.

Retirees need to avoid being in the position of having to sell during inopportune market environments. Being forced to sell at the wrong time can result in "reverse dollar cost averaging".

Reverse Dollar Cost Averaging
PLAN TO ALLEVIATE REVERSE DOLLAR COST AVERAGING

During the pre-retirement or accumulation stage, investors making systematic deposits into an investment portfolio will typically benefit from "dollar cost averaging". This benefit results from nothing more than taking advantage of periodic drops in the price of an investment being systematically purchased. During these periods of share price decline, the investor is getting more shares for the dollars being invested.

Once an investor retires and begins to receive systematic withdrawals from their retirement portfolio, these periodic declines in the price of these shares, now being sold to cover expenses, becomes detrimental. Retirees look to generate a certain amount of dollars to pay expenses so when the share prices of the investments in the portfolio decline, the retiree has to sell more shares to raise the dollars needed. This is "reverse" dollar cost averaging.

Best Practices for Retirement Income Planning
RETAIN CONTROL OVER YOUR RETIREMENT ASSETS

To help alleviate the effects of the sequence of returns and reverse dollar cost averaging, there are four very simple best practices that can be incorporated into your retirement income planning.

   1. Diversify Your Portfolio by staying invested in cash, fixed income and stocks.

   2. Use a Cash Flow Reserve Ladder when structuring the portfolio to provide allocations to cash and short-term, highly liquid investments, which is optimal. The retiree is not under duress to have to sell.

   3. Develop a Growing Income Stream using high and growing dividend paying stocks for the equity portion of the portfolio can provide a growing income stream that should reduce the dependency on capital appreciation to achieve the retirement plan.

   4. Use a Trusted Financial Advisor who can help thoughtfully develop and manage your retirement income plan. They can provide a line of defense during times of market turbulence.

While there is no way to adequately predict the sequence of returns you will experience during your retirement, you can control the timing of when you sell your assets to support expenses. Using the strategies outlined in this article can provide a framework that will help alleviate the negative effects of reverse dollar cost averaging and should be appropriate for the majority of retirees looking to retain control over their retirement assets.

If you would like us to mail you the information KIT with a FREE CD discussing the ins and outs of managing your retirement income please contact us today.
Review it online here: www.Thornburg.com

Let us get you started!
Online at our website: www.LamonAndStern.com
Call us at 770-951-8411

 --------------------------------------------------------------------------------------------------

Disclosures:

Following these strategies does not assure or guarantee sustainability of a retirement portfolio or better performance nor do they protect against investment losses.

Investments carry risks, including possible loss of principal. Bonds are subject to certain risks, including interest rate risk, credit risk, and inflation risk. The principal value of bonds will fluctuate relative to changes in interest rates, decreasing when interest rates rise. Investments in equity securities are subject to additional risks, such as greater market fluctuations. Investments in stocks and bonds are not FDIC insured, nor are they deposits of or guaranteed by a bank or any other entity.

The views expressed in this article are subject to change.

Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.

ROAD OF RETIREMENT INCOME Series | PART 2 of 7

Determine how the real return
from an investment compares
to the real return hurdle.

PRESERVING PURCHASING POWER
PART 2 of 7 Series:
THE ROAD OF RETIREMENT
The Process of Managing Retirement Income

Baby-boomer retirees may be particularly susceptible to the eroding effects of inflation, given that they will be less likely than past generations to have some form of pension that could be indexed for inflation. 

This generation is relying more on savings accumulated in 401(k), 403(b), IRA, and after-tax savings accounts to support them in retirement. Unless these savings are prudently invested during retirement to allow the income stream to grow at a pace comparable with the increase in inflation, purchasing power will be diminished.

To illustrate this concept, let's use a simple hypothetical case of a retiree who has $1 million in retirement savings and has decided to spend the amount evenly over a 30-year period ($33,333 per year). The retiree also decides not to invest the money to ensure safekeeping. Over the next 20 years, at an average annual inflation rate of 3%, purchasing power drops by 42% to the equivalent of $19,010 per year; and if inflation runs at 4% annually, purchasing power declines by 52% to $15,821. Imagine retiring at age 62 and by age 82 only being able to spend the equivalent of $15,821 per year in today's dollars!

3 Basic Variables to Retirement
BABY BOOMER RETIREES ARE SUSCEPTIBLE TO THE ERODING EFFECTS OF INFLATION

There are three basic variables that a retiree needs to factor: the length of time to be spent in retirement; the initial spending rate desired; and a legacy, if any, that the retiree wishes to leave. Each of these variables is described below.

    * Time Frame – the longer a retiree plans for their retirement to last, the more investment earnings are needed to support it. For retirement planning purposes, most advisors will use a minimum of 30 years, but in some instances 40 years may be even more realistic.

    * Spending Rate – the first year's after-tax spending amount (say $40,000) divided by the total retirement savings (say $1 million) for a 4% initial spending rate.

    * Legacy – how much of the initial retirement savings account is desired to be left as a gift to family members or charity upon the end of the retirement period.

Combining these three factors and preparing a simply cash flow model yields a real return hurdle (after the cost of inflation, investment expenses, and taxes) that must be achieved or exceeded each year to provide a retirement that will sustain itself for 30-40 years and beyond. 

For a majority of the baby-boomers retiring in the coming years, most, if not all, of the retirement savings accumulated during retirement plus the future earnings on these savings will be spent over their planned retirement period. The concept of spending some, if not all, of the retirement savings to fund a retirement will be the norm, not the exception.

Retirement Return Hurdle
STARTS WITH IDENTIFYING EACH RETIREE'S  UNIQUE COST STRUCTURE

For these retirees, a legacy amount will be available only if they do not use all their financial resources due to an unusually strong investment market or if spending amounts are actually less than planned. However, for those retirees who want to plan a legacy at the beginning of the retirement plan the real return hurdle would be required to provide for a sustainable spending plan, plus leave a legacy at the end of the 30-year plan. Needless to say, higher returns are required to achieve both objectives.

Planning for a 30- to 40-year retirement period makes preserving purchasing power of paramount importance.

Being able to see how the retirement plan variables relate to a real return hurdle is a great first step. Going through the process of identifying each retiree's unique cost structure, including inflation assumptions, investment expenses, and taxes, will determine how the real return from an investment compares to the real return hurdle needed to accomplish the plan.

Please note that any discussion related to average returns over a long period of time, such as a 30- to 40-year retirement, needs to be accompanied by a good understanding of the order in which returns are realized, called the "sequence of returns". For a retiree who is liquidating a small amount of their retirement savings each year to support the expenses, the order in which returns are realized is very important. We have addressed this sequence of return issue as a separate piece in this kit and it should be deemed as integral part of the discussion on preserving purchasing power.


If you would like us to mail you the information KIT with a FREE CD discussing the ins and outs of managing your retirement income please contact us today.
Review it online here: www.Thornburg.com

Let us get you started!
Online at our website: www.LamonAndStern.com
Call us at 770-951-8411

 --------------------------------------------------------------------------------------------------

Disclosures:


Bonds are debt investments in which an investor loans money to an entity (corporate or governmental) which borrows the funds for a defined period of time at a fixed interest rate. Bonds are subject to certain risks including loss of principal, interest rate risk, credit risk, and inflation risk. The value of a bond will fluctuate relative to changes in interest rates; as interest rates rise, the overall price of a bond falls.

Government bonds, or Treasuries, are negotiable debt obligations of the U.S. Government, secured by its full faith and credit and issued at various schedules and maturities. Income from Treasury securities is exempt from State and local, but not Federal, taxes. Treasury bill data is based on a one-bill portfolio containing, at the beginning of each month, the bill having the shortest maturity not less than one month. Intermediate government bond data is based on a one-bond portfolio with a maturity near five years. Long-term government bond data is based on a one-bond portfolio with a maturity near twenty years.

A corporate bond is a debt security issued by a corporation. Corporate bonds are taxable and have more credit risk compared to Treasuries. The Citigroup Long-Term High Grade Corporate Bond index includes those issues from the Credit Index that have at least 10 years to maturity (long term) but exclude asset-backed securities and non-U.S. sovereign/provincial issues.

A stock is a share in the ownership of a company. As an owner, investors have a claim on the assets and earnings of a company as well as voting rights with the shares. Compared to bonds, stock investors are subject to a greater risk of loss of principal. Stock prices will fluctuate, and there is no guarantee against losses. Stock investors may or may not receive dividends. Dividends and gains on an investment may be subject to federal, state or local income taxes.

Standard & Poor's 500 Stock Index is an index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe.

ROAD OF RETIREMENT INCOME Series | PART 1 of 7

Balance lifestyle and
long-term sustainability of
the retirement portfolio.

THE LANGUAGE OF
RETIREMENT INCOME PLANNING
Part 1 of 7 Series:
THE ROAD OF RETIREMENT
The Process of Managing Retirement Income

The oldest of the baby-boomer generation is now 63 years of age and moving ever closer to the age when a "traditional" retirement would begin. 

Much has been written on the impact the baby-boomer generation has had on society and what retirement will look like for them going forward, but there hasn't been enough written on the topic of retirement income planning, from a process point of view.

The road of retirement should be paved with more than good intentions. Soon-to-be retirees need to develop and follow a retirement income plan that balances current lifestyle and long-term sustainability of the retirement portfolio. The Road of Retirement series provides some best practices for accomplishing this balance.

In advance of reading the various articles, it is important to be acquainted with the unique language of retirement income planning.

It has emerged in the past ten to fifteen years as academics study the unique issues facing the baby-boomer generation. While this is not meant to be an exhaustive list, it will provide some of the essentials for the topics addressed in this Road of Retirement series.

• Longevity.
• Sustainability.
• Purchasing Power.
• Initial Spending Rate.
• Current Spending Rate.
• Spending Policy.
• Accumulation Phase.
• Reverse Dollar Cost Averaging.
• Sequence of Returns.
• Legacy.
• High and Growing Dividend Stocks.
• Real Returns.
• Real Return Hurdle.
• Income Replacement Ratio.
  

Best Practices for Retirement Income Planning
FIND A TRUSTFUL FINANCIAL ADVISOR

The use of a trusted financial advisor to help you thoughtfully develop and adhere to a retirement plan during your journey on the road of retirement is highly recommended. While baby-boomers are expected to spend many years in retirement, with this extended time will come many changes in the financial markets, family needs, health concerns, and legacy issues. These changes will result in times of challenge and prosperity. A good financial advisor will provide the last line of defense between you and yourself during both.

If you would like us to mail you the information KIT with a FREE CD discussing the ins and outs of managing your retirement income please contact us today.
Review it online here: www.Thornburg.com

Let us get you started!
Online at our website: www.LamonAndStern.com
Call us at 770-951-8411

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Disclosures:
Following these strategies does not assure or guarantee sustainability of a retirement portfolio or better performance, nor do they protect against investment losses.

The views expressed in this article are subject to change.

THE PROCESS OF MANAGING RETIREMENT INCOME Series

Ask us how to build
cash flow for your
retirement.

Lamon & Stern, Inc., in partnership with Thornburg Investment Management Funds, offers strategies for building retirement wealth.  Every month, on this blog, we will supply insight into THE PROCESS OF MANAGING RETIREMENT INCOMES.

Our ROAD OF RETIREMENT series will cover:
>> The Language of Retirement Income Planning
>> Preserving Purchasing Power
>> Sequence of Returns & Reverse Dollar Cost
>> Endowment Spending Policy
>> Building a Cash Flow Reserve Ladder
>> The Values of Dividends in Retirement
>> Converting Savings into Monthly Spending

If you would like us to mail you the information KIT with a FREE CD discussing the ins and outs of managing your retirement income please contact us today.

Review it online here: www.Thornburg.com

Let us get you started on your Retirement Planning Today!
Online at our website: www.LamonAndStern.com
Call us at 770-951-8411