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

A paper by Rick Wurster, asset allocation portfolio manager at Wellington Management, detailed simulations comparing the portfolio of someone retiring in 1929, the beginning of the Great Depression, to someone retiring in 1966, the beginning of the Great Inflation, a massive inflationary era that spanned two decades.

Titled "DC 20/20: Bringing the Key Drivers of a Secure Retirement Into Focus," Wurster's paper states, "The individual who retired during the Great Inflation had about 70 percent of the value of his or her savings wiped away over the course of 16 years by inflation alone and, as a result, ran out of money early."

Meanwhile, the 1929 retiree's investment portfolio provided more purchasing power as a result of three years of early deflation, ultimately resulting in portfolio success despite the stock market's dramatic fall.

The best assets for fighting inflation will be equities, but a diversified portfolio should have a smattering of all the inflation-fighting asset classes, including Treasury inflation-protected securities, or TIPS, and commodities.

Yu recommends energy, general commodities and some precious metals as inflation fighters -- but don't go overboard.

"(You don't want) a lot at that point in your life. You don't want all that much volatility. In those three baskets together, maybe 5 (percent) to 6 percent of the overall equity portfolio is there," he says.


Taxes are a largely unavoidable expense, but their impact can be mitigated with a little strategizing.

Generally speaking, one of the best ways to reduce your tax bill in retirement is with a Roth IRA or Roth 401(k). With a Roth account, taxes on contributions are paid upfront. The contributions and all of the earnings are tax-free when you take withdrawals in retirement.

But there are other ways to limit your tax liability in retirement. One is by paying attention to the types of investments held within a taxable brokerage account as opposed to a tax-favored account such as a traditional IRA, a Roth IRA or a 401(k).

For instance, stock mutual funds could be an important source of growth in retirement, but mutual funds can incur capital gains for investors when investments within the fund are sold. These gains may occur when the fund experiences losses and are beyond the control of fund investors.

"In an IRA you can afford to have capital gains come off, and you can afford to have interest that's not tax-free, so you can afford to have taxable bonds that might have a higher rate of return because you're not being taxed until you take a withdrawal," says Lynn Mayabb, CFP, senior managing adviser of BKD Wealth Advisors in Kansas City, Mo.

Conversely, using tax-efficient investments, such as municipal bonds, ETFs or index funds, in a taxable brokerage account would be more wallet-friendly than more taxing investments when it comes time to pay Uncle Sam.

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