Managing Income in Retirement
Managing income in retirement
Design an investment portfolio for success

"Let's say a retiree has 60 percent in fixed income and then 40 percent in equities in a hypothetical $2 million account, and the equity markets drop 20 percent. The client is down $160,000 on the equity side of his portfolio. On the fixed-income side, the $1.2 million in fixed income probably went up by 4 percent. So the true loss, because the client is a diversified investor, is really more like $110,000," Yu says.

Yu's plan of action after a big drop like that would be to sell bonds that have done well and buy more equities. He would also ask the client to take out less money that year and pay himself or herself back down the road.

Withdrawal strategies 

Withdrawals from retirement investment portfolios need to be highly strategized and planned in advance. Haphazardly selling investments that are down to scoop out funds will undermine the longevity of your portfolio.

Just as workers should rebalance to their ideal asset allocation in the accumulation phase, retirees need to keep an eye on their asset allocation and stay close to their plan. In addition to selling assets that have done well and buying more of the losers, retirees will also harvest some of those gains to go into their shorter-term money earmarked for spending in the near future.

Many financial advisers recommend using a bucket system to illustrate the tiered system of long-term versus short-term investments. Cash and cash equivalents would account for most of the money to be spent in the near future -- that can be anywhere from the next six months to the next five years.

"When the markets are doing really, really well, you want to whisper in the client's ear, 'Let's just take a little bit off and put that into fixed income. So you can go spend it.' I want to control when I sell and not be forced to sell in a down drop," says Yu. "That's why it's so important to put the heavy lifting upfront in designing a portfolio, investment statement and investment strategy and then sticking to it with conviction."

Dr. Gregory W. Kasten, CFP and CEO of Unified Trust in Lexington, Ky., uses buckets for his clients with the front bucket representing spending cash for the next five years.

"Let's say I need $50,000 to fund the next five years. When I go through the first year, I've taken out one year of $10,000 and have four years left. But I'm always trying to keep five years of very conservatively invested income in front of the client," says Kasten.

"I would then look at stocks and bonds and replenish that bucket with whichever investment did the best over the past year -- selling high in other words," he says.

His own research has found that pruning the winning investments to fund income needs can improve the survivability of a retirement investment portfolio by 10 percent to 18 percent.


If you think market volatility will be the main culprit in weakening your investment portfolio, think again. Inflation will eat its lunch.


Show Bankrate's community sharing policy

Connect with us