Shekel money bills.
(photo credit: REUTERS)
The financial media is full of retirement advice. Most of the advice is based on cookie-cutter solutions, such as needing 80 percent of preretirement income in order to retire, drawing down 4% of your portfolio annually, or investing in a few hot stocks to “guarantee” a secure retirement.
Retirement planning has to be specialized and personalized to the individual retiree. An approach that makes sense for a retiree with $5 million in the bank and a vast real-estate portfolio may have no basis in reality for a retiree with $750,000 in savings and children and grandchildren to support. When reading these articles I am often left with the feeling that the authors have never sat down across from a living, breathing retiree.
A lot of these articles fool investors into a false sense of security. Retirement advice is not “one size fits all.” It has to be specialized to specific situations. What are the goals of the retiree? Do you want to spend every last penny before you die? Do you want to help children and grandchildren while they are still alive, or leave an inheritance? For wealthier retirees, the question of philanthropy is of great importance. Why don’t we ever see these issues brought up in the media? Understand expenses
For investors of modest means (defined broadly as $200,000 to $500,000 in investments, home owner, current yearly income $50,000 to $70,000 and will receive Social Security and some modest pension), the most important aspect of planning you can do vis-à-vis your retirement is to try and figure out your estimated expenses.
Here is where I differ from the 80% crowd. My general principal is that leisure equals money spent. The more free time people have, the more money they will spend. Whether it’s going with your spouse to a café for lunch, traveling a few times a year, or pampering grandchildren, the early retirement years can be costly.
If you can figure out how much money you will need, then you can figure out how much income you will need to generate to supplement your pension, Social Security and any other income sources you may have (part-time work, etc.).
Create income stream
Once you have a handle around your income needs, you should go ahead and create an income stream. Forget about the 4% drawdown rule. In many instances you can create a portfolio that will be able to generate the income you need without having to draw down principal. High-yield, international bonds and non-traded REITs are good ways to balance a portfolio and generate much higher levels of income than you will generate in government bonds or CDs.
Growth and inflation
Retirees still need growth assets in their portfolios. As we are living longer, we need to make sure that we don’t outlive our savings. In addition, investors need to protect the purchasing power of their money by keeping up with inflation.
Dividend stocks that have a history of rising dividends are an effective way to solve both of these issues.
The beauty of investing in dividend-paying stocks is that you get the best of both worlds. You get the potential capital appreciation that stock investing gives you, and you also receive a steady income stream that is at least as competitive with, or more than, investing in bonds. With more than a few large, blue-chip companies paying dividends that are in excess of 3.5% annually (compared with about 1% to 2% for a highly rated bond), many retirees can enhance their income streams with these stocks. Although I am not recommending that you go out and buy them, companies like Kimberly Clark and Johnson and Johnson would be examples of rising dividend stocks.
Investors need to realize that markets can fall dramatically, and if they are near retirement, a big market hit can put a major dent into retirement plans. That’s why as investors get within five years of retirement, you should become much more conservative and adjust your allocation to start creating the aforementioned income stream.
Don’t rely on some general advice when planning your retirement. Sit down by yourself or with an adviser and start figuring out your goals and needs. Some solid planning will go a long way toward financial peace of mind in your retirement.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its email@example.com Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book
Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.