Five Keys to Hitting Your Retirement Goals
While conventional wisdom is used to calculate the percent of pre-retirement income you should aim to replace in retirement, we believe “unconventional” wisdom (and strategies) should be used to meet these retirement income goals. In addition, a retiree is more likely to reach his/her goals when partnering with an advisor who can effectively implement these strategies and then provide the discipline to keep you on track while in retirement.
Here’s 5 of the major “unconventional” strategies we recommend:
- Multi-Disciplined Retirement Strategy (MDRS)
Proper asset allocation and diversification are the most powerful ways an advisor can help a client manage retirement risks (volatility, sequence of return, inflation, interest rate and longevity) and achieve their retirement income goals. The best part is you don’t have to give up return for a reduction in risk. Who says you can’t have your cake and eat it too?
A recent research study commissioned by Nationwide Financial and completed by Morningstar Investment Management LLC, compared a traditional 60/40 stock and bond portfolio to a portfolio consisting of stocks, bonds and fixed indexed annuities (FIAs). The study concluded that by repositioning a traditional retirement portfolio consisting of 60% equities and 40% bonds to a portfolio consisting of 36% equities, 24% bonds and 40% fixed indexed annuities (FIAs) offers virtually the same return, but with a 40% reduction in potential portfolio risk and volatility. Research has indicated that when taking income from a retirement portfolio, the portfolio with the lower volatility will last longer.
This “unconventional” Multi-Disciplined Retirement Strategy (MDRS) combining traditional investments (stocks and bonds) with an allocation to FIAs (for portfolio volatility reduction) offers the optimum blend of growth and risk reduction for maximum retirement portfolio sustainability. To read more about our MDRS strategy see our white paper: https://yourretirementadvisor.
- Tax Efficient Withdrawal Strategy
There’s no getting around taxes is the conventional wisdom employed by most retirement planning strategies. But there’s a multitude of retirement tax planning strategies to offset income from a variety of sources.
Re-categorizing retirement assets and utilizing an unconventional tax efficient withdrawal strategy versus the conventional withdrawal strategy can reduce taxes to 0% in retirement and potentially add 5-15 or more years of portfolio survival. The most significant benefit of this is you don’t have to add a single cent to your portfolio.
Efficiently repositioning retirement assets and utilizing the proper sequence of withdrawals (tax-free accounts, tax-deferred accounts, and taxable accounts) can reduce the negative effect of Required Minimum Distributions (RMDs) and Social Security taxation creating a more effective withdrawal strategy.
- Social Security Maximization
Utilizing the optimal filing strategy and proper timing to begin Social Security benefits can dramatically increase your income and ultimately increase retirement portfolio survival rates. It’s important to use sophisticated software to also consider the tax implications. In some situations, Social Security could be taxed up to 85%. It’s critical to understand how to avoid taxes to the greatest extent possible.
- Investment Management
Utilizing high quality money managers or individual stocks combined with “low-cost” index strategies can yield a higher portfolio return or increased Alpha (above benchmark returns). It’s imperative to utilize managers that have proven Alpha ability, in combination with indexing asset classes where Alpha is harder to attain. In addition, low advisor fees are paramount to allowing a portfolio to outperform the appropriate benchmark over time. Your advisor should partner with institutional money managers that have access to institutional investments that aren’t available to individual investors. These investments carry substantially less internal expenses. If fees are kept as low as possible, Alpha increases.
Independent Investment Analysis –By working with an independent advisor he/she can use virtually any mutual fund, exchange traded fund or stock with no proprietary pressures. Your advisor should use screening criteria to identify and utilize the “best of the best” money managers to offer the highest potential returns with no potential conflict of interest.
- Income Buffer Strategy
Creating a “safe money” Income Buffer, that is unaffected by stock market portfolio downturns, will increase the stock portfolios survival rate when experiencing severe market losses. The buffer should be in place prior to retirement to withdraw from when the stock market suffers a loss above 10%. The buffer can consist of any asset that will be unaffected by a market downturn such as cash value life insurance, a reverse mortgage reserve account, short duration high quality bonds, guaranteed Equity Index Annuities, etc. An Income Buffer should be created with 5-10 years of required annual retirement income to assure the funds are available to produce income necessary in the event of stock portfolio losses. The buffer should be utilized for income until the stock portfolio fully recovers from the loss in value. This strategy will dramatically reduce the effect of market volatility risk and sequence of return risk.
If you would like to learn more about how these five keys can help you with your retirement planning, we welcome you to fill out an assessment to schedule a complimentary consultation with Brian.
