Income planning changes greatly as you near retirement. The strategies and tactics you have used for years, or even decades, to build your portfolio need to be adjusted as you reach this point. Retirement-minded individuals can’t follow the same roadmap they used in their accumulation years.
When it comes to money, almost every retirement-minded individual is looking for safety, yield and liquidity with their financial vehicles. But it’s difficult, if not impossible, to find all three of those characteristics without some major diversification. Still, there are ways for you to find a good combination of all three to rely on when you are at or near retirement, but you need to break down your portfolio into two distinct categories.
1. The Principal-Protection World
There are some financial vehicle options that are pretty secure. These include bank CDs, government bonds, fixed annuities and other similar products. The principal, interest and terms are guaranteed, but there are some downsides, including penalties for early withdrawals and fees. Another drawback to these financial vehicles is their low interest rates.
Sign up for Kiplinger’s Free E-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.
Options do exist that offer principal protection while letting people take advantage of gains in the market. These products include:
- Treasury Inflation-Protected Securities (TIPS)
- Equity-linked CDs (ELCDs) at banks
- Fixed index annuities
These products offer principal protection with interest determined based on an external market index. But, just like CDs or government bonds, there are penalties for early withdrawals, and your money is not directly invested into the market. However, there’s generally more potential to earn interest than some of the more liquid financial products.
2. The Risk World
Finally, there is the sphere that does have risk but also offers the upside of potential growth. In this world, you will find these choices, among others:
- Stocks
- Mutual funds
- Options
- Real Estate Investment Trusts (REITs)
- Variable annuities
Of course, in the Risk World, the principal is not guaranteed. Neither are interest or earnings. But the term is usually open-ended and, over time, these investments often prove effective. That time factor is one of the downsides for those at or near retirement, because most of us simply aren’t sure how much time we have to really make gains with our investments.
As we near retirement, we have to be careful how we distribute our money between different financial products. Of course, we all love the products that have market risk when the market is going up but, when it’s plunging, it’s a very different story. Very few people at or near retirement can afford to face a major loss like what happened to too many of us back in 2008. The question for many, especially those of us drawing close to retirement, is how to avoid those kinds of losses.
Drawing up a plan that balances the worlds of principal protection and risk is a complicated process. A good financial professional, especially one who focuses on planning for retirement, can help you plan for market volatility. They’ll be able to help you manage risk or even find out how much risk you are comfortable with. A knowledgeable retirement professional can help map out how much of your assets you want subject to market risk and how much you want secured with principal protection.
Before you build your retirement income plan, you have to know how much of your wealth you want in each of the worlds mentioned above. There’s no one model that works for every individual, of course. Some of us want more guaranteed income. Others prefer to rely on the stock market and other financial vehicles, which include elements of risk.
Regardless, all retirement-minded individuals want to move from paychecks to “playchecks.” A good retirement professional can help you do just that, helping you navigate these two worlds of financial vehicles.
Don Ross, founder and president at Ross Wealth Advisors, has more than 25 years’ experience in the insurance and financial services industry. Don lives in Upper Arlington, Ohio. He and his wife, Joni, have three children: Judith, Ryan and Lance.
-
TSA Expands PreCheck Access for Military Members, Families and VeteransEnhanced "Serve with Honor, Travel with Ease" initiative lowers barriers to expedited screening for service members and their loved ones.
-
What to Know About New Medicaid Cuts: Is Your Local Hospital Closing Soon?Tax Policy Trump’s ‘One Big Beautiful Bill’ is now law, and rural hospitals across the U.S. are on the chopping block.
-
Key to Financial Peace of Mind: Think 'What's Next?' Rather Than 'What If?'Even if you've hit your magic number for retirement, it's hard to stop worrying about money. Giving it a clear purpose is one way to reduce financial anxiety.
-
Three Estate Planning Documents a Business Owner Can't Afford to SkipA business owner's estate plan should protect the company and its employees as well as the entrepreneur's heirs. These three documents are critical.
-
Financial Fact vs Fiction: Why Your 'Magic Number' Isn't Actually MagicalDo you think you're diversified if you're invested in the S&P 500 and Nasdaq? Do you think your tax rate will fall in retirement? Think again — and read on for other myths that could be leading you astray.
-
Opportunity Zones: An Expert Guide to the Changes in the One Big Beautiful BillThe law makes opportunity zones permanent, creates enhanced tax benefits for rural investments and opens up new strategies for investors to combine community development with significant tax advantages.
-
Five Ways Retirees Can Keep Perspective Through Market JittersMarket volatility is a recurring event with historical precedents (the dot-com bubble, global financial crisis and pandemic), each followed by recovery. Here's how people who are near or in retirement can navigate economic uncertainty.
-
I'm a Financial Strategist: This Is the Investment Trap That Keeps Smart Investors on the SidelinesForget FOMO. FOGI — Fear of Getting In — is the feeling you need to learn how to manage so you don't miss out on future investment gains.
-
Can You Be a Good Parent to an Only Child When You're Also a Business Owner?Author and social psychologist Susan Newman offers advice to business-owner parents on how to raise a well-adjusted single child by avoiding overcompensation and encouraging chores.
-
How Advisers Can Steer Their Clients Through Market Volatility (and Strengthen Their Relationships)Financial advisers need to be strategic when they communicate with clients during market volatility. The goal is to not only reassure them but to also help them avoid rash decisions, deepen your relationship with them and build lasting trust.
