Income Distribution

By Takara Alexis

In terms of your finances, your pre-retirement earning years focus on accumulation and growth of your money. You earn money from your job or business to pay for your current living costs. You put some aside for emergencies and for future needs such as college and retirement. Your goal is to acquire as much as possible by earning it and investing it.

After retirement, you typically no longer contain money earned from work or business to pay for your living expenses. You require safety and liquidity to ensure available funds for day-to-day costs of living along with growth to help ensure your funds last your lifetime. The growth-oriented portfolio structure of your earning years may no longer apply, and you may need to change the way you evaluate your portfolio’ s performance.

In fact, in an effort to help reduce risk and protect principal, plenty of retirees change their asset mix to a more conservative, income-based allocation. The result is a portfolio designed to give higher rates of current income and less volatility. Specifically, your need to preserve what you have now typically outweighs your need to grow your money at a benchmark rate, although you still need enough growth to ensure inflation doesn’t lower your purchasing power during retirement.

Depending on your age, your investment tendencies may lean too far toward growth or too far toward conservative income. If you’re at the leading edge of the Boomer generation, you might have experienced years of extremely high market returns, altering your expectations for your own portfolio toward the high end.

If you’re in the senior or “veteran” age group, however, you may harbor some distrust of stocks and over- confidence in bonds. Investors in this group also tend to underestimate their life expectancy, based on how long their parents lived. By overweighting your portfolio in the relative safety of fixed income and income investments, you increase the potential of outliving your money.

A retirement distribution plan seeks to find that common ground between lowered risk and greater return, taking into consideration all income streams (i.e., Social Security, wages, pensions, investment income, annuity income), assets, inflation risk, investment risk and tax exposure. Numerous variables can come into play, so each factor must be evaluated based on the individual situation.

Generally, a retirement distribution model will allocate a larger portion of assets to fixed income and income segments, followed by growth and income, growth, aggressive growth and most aggressive segments in progressively lesser percentages. The intended result is an inflation-adjusted income that lasts your lifetime by minimizing emotional investment decisions, keeping purchasing power, minimizing risk, preserving principal and maintaining an appropriate amount of long-term asset growth.

Putting together a retirement distribution plan could be complex and requires a thorough understanding of investment products and strategies and their associated risks. Your financial expert can help you determine the asset allocation model and products that best meet your needs.

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