What is a bond?
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.
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Showing posts with label baby-boomer retirement planning. Show all posts
Showing posts with label baby-boomer retirement planning. Show all posts
Monday
Wednesday
ROAD OF RETIREMENT INCOME Series | PART 5 of 7
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| Quickly liquidate assets into potentially more favorable investment markets. |
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.
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.
Labels:
baby-boomer retirement planning,
cash flow reserve ladder,
MANAGING RETIREMENT INCOME series,
thornburg investment management fund
Location:
Atlanta, GA, USA
ROAD OF RETIREMENT INCOME Series | PART 4 of 7
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| A decrease in the spending amount during an extended bear market is vital for improving the sustainability of a retirement portfolio. |
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.
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.
Labels:
baby-boomer retirement planning,
cash flow reserve ladder,
MANAGING RETIREMENT INCOME series,
thornburg investment management fund
Location:
Georgia, USA
Thursday
ROAD OF RETIREMENT INCOME Series | PART 2 of 7
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| Determine how the real return from an investment compares to the real return hurdle. |
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.
Labels:
baby-boomer retirement planning,
MANAGING RETIREMENT INCOME series,
retirement income planning,
thornburg investment management fund
Location:
Georgia, USA
Tuesday
ROAD OF RETIREMENT INCOME Series | PART 1 of 7
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| Balance lifestyle and long-term sustainability of the retirement portfolio. |
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
--------------------------------------------------------------------------------------------------
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.
Labels:
baby-boomer retirement planning,
MANAGING RETIREMENT INCOME series,
retirement income plan,
retirement portfolio,
thornburg investment management fund
Location:
Atlanta, GA 30339, USA
Thursday
Master Your Retirement Growth
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| Retirement Income Planning |
Let Us Help You Master
Your Retirement Nest Egg
Your Retirement Nest Egg
Anyone who has taken a thorough look at the major areas of his or
her financial life, (such as insurance, tax management, estate
planning, and capital accumulation),needs to carefully plan in order to
ensure that all of the pieces are working together to produce the most
favorable results.
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.
Our Road of Retirement series provides some best practices for accomplishing this balance.
Lamon & Stern can help you reach those results with in
depth evaluation of your financial profile. This includes an assessment
of every aspect of your financial life and provides you with detailed,
interactive recommendations.
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| Hollis Lamon Lamon & Stern Atlanta, Georgia |
Contact Hollis Lamon of Lamon & Stern today for all your retirement planning needs! 770-951-8411
Wednesday
FINANCIAL PLANNING TERMS...Government Bonds aka Treasuries
What is a government bond?
What is a treasury bond?
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.
What is a treasury bond?
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.
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