





  
  
 











 

 


 

 
   
 


Michael J. Dougherty, MBA

5445 DTC Parkway, Suite P4 Greenwood Village, CO 80111
303-740-6605
Securities Offered Through LPL Financial, Member FINRA/SIPC
 


P eople who are living comfortable retirements today typically count on income from employer plans,
Social Security, their own investments, and sometimes profits from selling their homes to anchor
their financial security.
The challenge they face, and one you may anticipate for yourself, is how to chart a course to manage
their income most effectively, so that it lasts as long as they need it. Part of the answer lies in
coordinating what’s coming in with the bills you must pay. Another is in calculating the return you need
to make so that you can have your funds grow and provide you with income to last you the 30 years or
more that may be ahead of you.


Building an investment portfolio over time may be the best approach to producing the retirement income
you need, but it’s not the only way. If you get lump sum payouts or bonuses from your employer, inherit
money, or even win the lottery, you can use the money to make smart investments to help support you
in retirement. The more you know about how various investments work, the kinds of income they can
provide, and the ways you can make them grow, the smarter the financial decisions you can make.


If you don’t have a pension or an employer sponsored retirement saving plan, which typically pay
income on a regular schedule, you’ll have to pay extra attention to coordinating your cash flow.
Reducing your housing costs may be a primary concern. That’s true in part because reverting to
the older pattern of living with your children and grandchildren in retirement is unlikely - even if it
sounds appealing - since family structures have changed dramatically. Women who were the traditional
caregivers are increasingly working outside the home. And retirement periods can last 20 or 30 years, or
even longer, a long time to share living space.


Investing is no less important when you’re retired than it is while you’re working. As long as you’re
earning income, you can contribute to an IRA until you turn 70 1⁄2. If you open a business, you might
set up a tax-deferred retirement plan for yourself. Plus, you can always invest in taxable accounts.
What you’re aiming for is a combination of growth and income you can count on, year in and year out,
to supplement your Social Security income and any pension you receive.

There are other reasons to continue to invest, of course. Investments help you pay for other things that
are important to you, such as your own home or your grandchildren’s education. Investments also let
you build an estate to leave to your heirs.

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


M any retirees and pre-retirees make this mistake: not having a clear sense of what you’ll be
spending, both on the everyday costs of living and on the special activities you’re planning.


You’ll find general agreement among retirement experts that you need between 70% and 90% of your
preretirement income to maintain your standard of living after you stop working. That formula may
be too simplistic. A better way is to figure what you’ll actually be spending. One place to start is to
calculate what the essentials are costing you right now: food and clothing, heat and home maintenance,
utilities, insurance, and property taxes, etc.. You can be fairly confident you’ll go on paying these bills
and that inflation will push their cost up.

Next, think about the things you’re

likely to spend less on. Your mortgage
may be paid off, you won’t be
commuting, and maybe your financial
responsibilities for children and
parents will come to an end. You may
be paying less in income tax, and after
you retire you’re no longer paying
into Social Security. Also consider
the additional expenses you may
encounter, such as higher medical
and dental care and the cost of your
plans for winter in a warm place and
summer in a cool one, or perhaps long-
postponed trips or educational courses
to master new skills and hobbies.


Ideally, what you would like to know ahead of time are the things that may go wrong, putting a
financial strain on your retirement income. Although you can’t predict what might happen, you can
prepare by creating an investment account equal to three to six months of living expenses earmarked
for any unexpected emergencies. Most experts advise you to keep your rainy-day money liquid, which
means you can turn it into cash easily if you need it.

2
A good example might be having these funds deposited into a saving or moneymarket account. The danger
of investing your emergency fund in stocks or other equities is that you risk having to sell during a period
when prices are down if you need cash immediately. This is one case where—on a limited portion of your
portfolio—stability is more important than growth. If you don’t need the money to cover a serious illness,
accident, or other unpredictable problems, you’ll be able to leave the unused assets to your heirs.


The tried and true way of figuring out the cost of living in retirement is to list all your current expenses and
then estimate what they’ll be next year and on into your retirement years. This is something we routinely
work on with our clients. You can also anticipate whether you’ll have what you need, based on:
• The number of years until you plan to retire.
• The amount you have already saved.
• The anticipated inflation rate.
• The estimated real rate of return, or what you earn
on your investments after adjusting for inflation.

* What’s essential is being realistic about how much you’re saving and how long those savings will last.


The most revealing thing that projecting your future needs will tell you is how much you must withdraw
from your retirement accounts each year to produce the income you need to maintain a comfortable life. But
risks to this analysis do exist. For example, withdrawal rates more than 5 percent carry ever higher statistical
risks of the retiree running out of funds. Another example is “longevity risk”. It is quite feasible and highly
probable for today’s generation
of baby boomers to spend 25
to 30 years in retirement. For
a 65 year old couple retiring
today, it is likely that at least
one of them will reach age 90.

Still another risk is “inflation

risk”. After 25 or more years
in retirement, a steady source
of income will likely be worth
a third to a half less than it
was at the start of retirement.
So as you prepare for your
retirement, you need to keep
these and other points in mind.

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 



T he challenges of retirement planning are all about saving and spending How much has been saved
so that in retirement the wealth can be drawn down and spent? Both sides of the issue - savings and
distribution - involve the same challenges: how to deal with uncertainty in the personal circumstance of
the person retiring, such as death and disability, and how to deal with uncertainty in investment returns.
How should you use the assets you’ve accumulated to make your retirement as comfortable and rewarding
as you want it to be? The answer depends, in part, on what your attitude toward spending money is.
Generally speaking, I see two major categories of retirement spenders (with a large number of
variations in between):

• Those who live on their earnings only, trying never to use any of
the principal, or amount they initially invested.

• Those who plan to spend all their money, both principal and earnings,
while they are alive, which is sometimes described as total liquidation.

Certain retirement investments are better suited for one spending style than others. The smartest move,
assuming that you’ve accumulated a diversified retirement account with a range of investments, is to match
the way you use each investment type with the way it can serve you best.

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
There’s real logic in trying to preserve principal. It’s principal, after all, that has the
potential to produce earnings in your investment accounts year after year. That growth
forms the basis of your security. When the principal disappears, there’s nothing left to
accumulate earnings. On the other hand, assets left when you die are assets you didn’t
enjoy. Some of them can be passed to your heirs through your will or different types of
trusts, or become their property as the result of your naming them as beneficiaries. You
have no choice about whether to preserve
or spend in certain cases: Pensions are paid
out on a fixed schedule and, in most cases,
you’re required by law to withdraw from your
traditional IRAs, SEPs, and similar plans
once you’ve reached 701⁄2. But with other
investments, you can postpone withdrawing
from them until later in life, and in some
cases retirees never touch them at all.


Your attitude toward the assets you’ve
accumulated may well be “I earned it, I’ll
spend it.” Lots of people share that view, and
with good reason. The point of accumulating
retirement assets is, after all, your ability to
live a rich and fulfilling life for 20, 30,
or more years after you stop working.
Although the idea of spending all your
retirement money may seem reckless, the truth is that many retirement plans are set up for
precisely that reason. An annuitization plan, which you can choose for your pension payout,
promises to pay out your accumulated assets over a set period of years, or for your lifetime
or your and your spouse’s joint lifetimes. In other cases, you can use up the assets as you
please, turning them into cash at whatever pace you like. The danger, of course, is using up
your assets while you’re still around to need them.

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


T he third common error retirees make is not coordinating all their sources of income, including income
from investments. If you don’t want to scale back your plans for retirement, you must be able to afford
them. That starts with making investments before you retire so that the income is available as you need
it. The second and equally important part of the job is managing the income so your financial life runs
smoothly.


There’s a big difference between a regular
source of income—such as a Social Security
check that’s direct-deposited in your account
each month—and income that’s less predictable
or even unexpected, like an inheritance. Extra
money can come in handy, but you can’t depend
on it to pay your bills. But if you’ve planned
ahead, your investments can play an important
part in providing additional regular income to
offset predictable costs - the ones that are due
every month or quarter.

You can get regular income from investments in several ways, based on the kinds you own. Some, like
bonds, pay interest on a regular, predictable schedule. You can also set up a system of regular withdrawals
from various accounts, or use cash to buy an annuity, which can provide fixed income paid out in regular,
usually monthly, installments for a specific period of time, or for your lifetime.


The big question is whether your combined sources of income will produce enough money, year in
and year out, for as long as you need it. The answer is that they can, if your return, or profit on those
investments, is sufficiently greater than the rate of inflation and the rate at which you withdraw. This way,
your investments continue to grow in value at the same time that they’re providing you with income. For
example, several well-known companies have paid dividend income to shareholders for years while the
value of the shares has fluctuated. If you owned enough shares, you could count on the quarterly dividend
payments to cover some of your predictable costs, even as those costs increased with inflation.

On the other hand, growth rates aren’t predictable and dividends aren’t guaranteed. So there may be
periods of time when income and growth slows. That’s why experts caution it’s essential to own a variety
of investments, including some that guarantee a steady, if less than spectacular,
rate of return.

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
If you have a varied portfolio of investments in place as you approach retirement, you’ll
make out best if you know how to tap them in the most productive ways. Here are some of
the things to consider:
• Learn the difference between investments designed to be depleted, or used up
in your in your lifetime and those that are better suited for building an estate.
• Create a withdrawal schedule to insure that your assets last as long as your need them,
usually for your estimated lifetime and perhaps your spouse’s estimated lifetime as well.

• Compare the tax consequences of different types of withdrawals so you get to keep more
and pay Uncle Sam less over the years.


Deliberately spending money so there’s
nothing left when you die makes a lot
of sense - if you’re not running through
your assets so fast that you end up short.
Depleting your resources is the principle
on which mandatory withdrawals from
certain tax-deferred investments is based.
For example, the government requires you
to set up withdrawals from your IRAs so
you’re using up those assets during your
lifetime. Making regular withdrawals
from annuities, which are also designed
as retirement income programs, works the
same way.

In contrast, you can invest to build your estate, which means preserving rather than depleting your assets.
You’re free to leave your taxable investments untouched if you don’t need the money, or you may choose
to withdraw some of the earnings while leaving the principal to grow. Of course, there’s nothing to stop
you from investing both ways, so that you have some accounts you intend to deplete to subsidize your
retirement and others you intend to preserve to leave to your heirs.

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 



W hen your charting the best course to collecting your pension, there’ll be several routes you can
take.

Once you’ve decided to retire, you may have to

make a decision about how to collect your retirement
income. The choice is usually between a lump
sumpayment and a lifetime annuity, or series of
equal payments. The most unnerving element in the
process is that once you’ve committed yourself, you
can’t change your mind. If you choose the lump
sum, you’ll also have to decide what to do with
the money. One common option is to put it into a
rollover IRAto keep the assets tax deferred, but you
might decide to take a cash payment instead.


While you don’t have to decide until you’re actually
ready to stop working, making the best choice
is critical. The factors you have to consider are
your age and health, what you want to provide for
your family, and what other sources of income you’ll have. In some cases, you have to consider your
employer’s economic health. For example, if you’re in poor health and concerned about providing for
your spouse, you might choose a joint and survivor annuity that will continue to pay while either of you
is alive. On the other hand, if your spouse is seriously ill, you might choose a single life annuity that
will provide a larger amount for you each month than a joint annuity would. Usually this requires your
spouse’s consent.


Defined benefit plans set their own rules for paying out a pension to retiring workers. You might have
to be a certain age, have worked a certain number of years, or a combination of the two. For example,
sometimes you’re not eligible to collect a pension until you reach 65, although other plans allow you
to begin sooner. The minimum is usually 55—provided you’ve participated in the plan for at least ten
years. If you’re younger, you may have to wait to collect. In most cases, though, your pension is paid
when you actually retire. You usually can’t postpone the payout, although it may be possible to defer
part of it.

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
Most employers who provide retirement plans provide experts to give you advice on the differences
between the payout options. While 65 is no longer the hard and fast retirement age it once was, many
defined benefit retirement plans are set up as though 65 were still the norm. If you retire earlier, your
employer may recalculate the pension you were promised to take into account the added years you’ll
be collecting instead of working. If you go on working after 65, federal rules require that your pension
keep on growing until you actually retire and collect on it. That should provide a boost to your income,
and perhaps act as an incentive to delay retirement.


If you have a defined contribution pension plan, you probably have to make similar choices at
retirement. In many cases, you can choose annual or periodic payments, a lump sum distribution, or a
rollover to an IRA. You are responsible for investing the lump sum or IRA to provide income during
your retirement. If you’ve participated in a stock purchase plan, you can hold onto the shares and
continue to collect dividends, or sell your shares and reinvest the money. Again, it’s up to you.


There’s no universal right answer about how to take your pension payout, but when you have to make a
decision, it helps to know the advantages - and the disadvantages - of your choices.


How comfortable you are with investing is a major consideration in deciding among the various payout
options. If you’ve been investing successfully for years, the prospect of building a portfolio you control
with a lump sum pension payout or an IRA rollover can be appealing and realistic. Your challenge will
be producing enough income during retirement.
But if you don’t want to worry about outliving your assets, you may opt for the relative security of
an annuity. Knowing that the same amount is coming in on a regular basis makes budgeting - and
occasionally splurging - a lot easier. Periodic payments offer many of the same advantages as an annuity
minus the assurance that your income will last your lifetime. But if you feel you’ll need the bulk of
your income in the early years of retirement, this could be the wise choice. You’ll also want to weigh
the amount you’ll owe in income tax. With a lump sum payout, you must pay the total that’s due at one
time, which can substantially reduce the amount you have left to invest. With the other options, you owe
federal income tax at your regular rate as you receive the money.

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 



The fifth most common error a retiree makes is not investigating all the different payout options they have with
their traditional IRA. Is it better to spend taxable funds first while letting you tax deffered IRA grow or is it
better to withdraw more funds from an IRA account early in retirement to potentially lower your tax bracket
later on in retirement?

You can begin withdrawing from your traditional IRAs at 59 1⁄2 without penalty. And by 70 1⁄2, you need a
strategy to meet the legal withdrawal requirements while getting the best return you can. You must take out at
least the required minimum, and may take more if you need the money for living expenses. But you also want
your accounts to continue to grow, to provide a source of income for as many years as you need it.


If you’ve accumulated a substantial IRA with
regular contributions or have transferred other
retirement plan payouts into a rollover IRA,
you’ll want to look at the big picture before
planning your withdrawals. One issue is
deciding which accounts to draw on first, and
another is selecting the way the money moves
from the IRA into your hands. If your IRA
investments are invested in stocks or bonds,
you can set up a regular - usually monthly
- distribution. Similarly, if you invest in an
annuity, you can likewise create an income
stream of monthly payments. It makes sense to
investigate the various payment possibilities,
including the fees that might apply.

When you decide which approach is best for you, you can put your plan into action and start collecting.
There’s no penalty for taking money out of your accounts at a faster than required rate. But the more you
withdraw, the more tax you’ll owe. And the balance left to accumulate new earnings will be smaller.

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To make planning even a little more difficult, the longer you live, the longer you can expect to live! According
to the IRS, the life expectancy of someone born today is about 82.4 years. But at 82, your life expectancy now
increases to 91. At 91, it increases to 96. If you live to 96 years old, your are then expected to live to be 100.

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The sixth common error a retiree makes is not having an effective investment strategy. Random buying
and selling - adding a few stocks here, redeeming a bond there - is rarely an effective strategy for
managing your money in retirement. By knowing what different investments can add to your portfolio,
the level of income you want to produce, and how much risk you are willing to take, you’ll have a
stronger opportunity, not a guarantee, of ending up where you want to be financially. Because you can
expect to live 20 or 30 years after you retire, you’ll want to continue to invest even as you begin taking
income from your retirement plans. If you’re retired and eligible to begin collecting Social Security, you
can use that income to help pay your basic bills, freeing up other income to invest.


While preserving principal is critical while you’re investing for retirement, there’s nothing wrong with
using some of the principal - say 4% to 5% a year - after you retire. But, you need a plan for tapping your
resources, similar to a withdrawal schedule for your IRA or Keogh, and a sense of which investments to
liquidate. A maturing bond, for example, can become a source of current income. When it comes due,
you can deposit the principal in a money market or savings account to draw on as you need cash. That
might be smarter than withdrawing money from an investment that’s doing well, or selling real estate
when prices are low.

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There’s no way to protect yourself completely
from market volatility without taking on inflation
risk. But there may be ways to produce a stream of
income while maintaining some long-term growth.

One approach might be to have a portion of your

retirement funds invested in bonds or CD’s to
provide stability and generate the income you’ll
need. At the same time, you can invest the
remaining portion into equities to provide the
growth you will need in the future. Remember,
though, that there are no guarantees in investing. While the markets could be strong in any period, you
could also have flat or falling returns and even lose principal during other periods. That’s why it’s very
important to have your portfolio balanced to meet your risk tolerance as well as your long term growth
needs. Further, retirement portfolios should be rebalanced to insure that they are tuned to your goal and
keep you on course.

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The seventh most common retirement error is not having the correct asset allocation for your investments. There
are a number of ways to diversify up your assets. If you’re a cautious investor, you’ll stress bonds and cash. The
more aggressive investors will invest more into stocks. But you will need a strategy you can live with in both
positive and negative markets.


A cash investment is money you can get your hands on in a hurry - like a money market fund—usually without
risking a big loss in value. And while putting your money in a regular savings account has serious limitations as
an investment strategy, the logic behind creating a cash reserve makes a lot of sense. If all your assets are tied up in
stocks and bonds, and you need to turn them to cash quickly, you may take a loss if the market is down.


In an asset allocation model, stocks, or equities, represent growth. While some stocks pay dividends that provide
a regular income, stocks, as a group, are part of long-term investment planning because historically they have
increased in value. While it’s possible to lose money in the stock market in any one year, the longer you stay in
the market, the more likely you are to come out ahead. The more aggressive investors tend to stress equities
in their portfolios, sometimes committing 80% of their assets to stock and equities. Moderate investors also
concentrate 60% or more of their assets in equities, seeking long-term growth. Many investors scale back the
percentage of stock in their portfolios as they grow older, shifting more of their assets into income-producing
investments or those that preserve capital.


Bonds have traditionally been seen as income-producing investments. If you buy a bond and hold it to maturity,
you will receive interest payments every six months. Then you get the principal back when the bond matures.
Most experts advise all investors to include bonds in their portfolios because they provide additional
diversification and can help reduce the overall volatility of your portfolio.

If you would like a complimentary consultation about

retirement planning, please call Mike Dougherty at
Dougherty Wealth Management at 303-740-6605.
For over 30 years Mike Dougherty has been assisting
pre-retirees and retirees.
Dougherty Wealth Management is an independent, fee-based advisory
firm. We have no proprietary products to sell or sales quotas to meet.
Simply, we offer advice and provide service that’s in
the best interest of our clients.
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