Investing for Retirement: Longevity and Diversification

Investing for Retirement: Longevity and Diversification

Investing for retirement is, in some ways, easy. But once it comes to investing during retirement, and investing during retirement for income, things get a bit more difficult.

For one, there’s the risk of longevity. “The biggest question that we can never answer is, ‘How long are we going to need the money?'” says Spencer Betts, a certified financial planner with Bickling Financial Services. “That question is easier when saving for retirement, because we can predict when we want to retire. If we don’t reach our savings goal, it’s easy to delay retirement for a short period of time until the goal is reached. Once we retire and are living off of our investments, what happens if we run out of money? It’s unlikely we can return to work at that point.”

Before deciding what type of income-producing investments to consider once in retirement, Betts says it’s important to answer these questions: How much income — as a percentage of your assets — do you need to generate? What is your normal risk tolerance and ultimate goal for your money once you pass away? Is passing money to the next generation a top priority?

If you have Social Security and a pension or other guaranteed sources of income from your investments for supplementing your income for non-essential expensive like travel and gifts, consider a more conservative fixed
-income portfolio. “Why take the risk if it is not needed?” he asks. “In general, if you need 2% income from your portfolio, that is for a $500,000 portfolio only needing $10,000 per year, you can be conservative and not need to invest in equities.”

If, however, you don’t have any guaranteed sources of income outside of Social Security and you need your portfolio for a majority of your income in retirement you need to start looking at asset allocation, says Betts.

If, for instance, you need 4% or more income off your investments in today’s interest rate environment it would be difficult to invest only in fixed -income or bonds, says Betts. “At this point you would need to add in some stocks or equities,” he says. “The type of equities and the amount of equities is based on your income need, risk tolerance and taxes brackets.”

If the income is coming from a retirement account, Betts says your tax bracket doesn’t make any difference because all money coming from a traditional IRA or other pre-tax investment are paid out as ordinary income for tax purposes. By contrast, he says, money held in non-retirement accounts are subject to different tax treatments depends on the type of investments. You receive income from your investments as interest payments, dividend payment, short-term capital gains or long-term capital gains, all having different tax treatments.

Dividend focused investments are normally the most established companies with part of their returns given out as dividends, says Betts. “These stocks tend to be slightly less volatile but that is not guaranteed and there is no princip
al protection,” he says. “Current taxes rates make capital gains tax relatively attractive, so a focus on total return can benefit (those) with a long-term horizon who are willing to deal with volatility.”

Betts says a diversified portfolio of some growth companies, some dividend companies and some fixed-income is normally the most attractive for those with a long-term need for income in retirement. To be sure, one can also look at some non-traditional asset classes such as real-estate that can provide some income, though such investments are not guaranteed like a bond. Annuities can also offer a guaranteed source of income for right person, says Betts.

“The balance between different investment choices listed above to match income needs, risk tolerance and long-term goals is what financial planning and advisory asset management is all about,” says Betts.

Plus, he says, “reviewing your options with a trusted adviser prior to retirement and doing retirement income projections can help reduce the stress and complexity or setting up your retirement portfolio.”

Others share Betts’ point of view. “There are a number of ways retirees can generate income from investments but it is imperative that any investment decisions are based on comprehensive financial and retirement planning,” says Douglas Boneparth, a certified financial planner with Bone Fide Wealth.

From this planning, he says will be in a position to make informed decisions when it comes to your retirement assets. “The most common and less-risky way is through investing in bonds,” Boneparth says. “Bonds can generate stable income and do not fluctuate in price like stocks do.”

However, bonds generally do not provide for asset growth, which, Boneparth says, can also be important depending on the investor’s needs and investment objectives. “This is where dividend paying stocks come into play,” he says. “They provide both income an d the opportunity for growth.”

However, he notes, “a company’s future dividends can be erased in an afternoon on some bad news, while a bond’s coupon will pay as long as the company has not defaulted.”

Figuring out what asset allocation is right for once again comes down to a number of factors, says Boneparth. “One’s appetite for risk and their need for income will be the primary drivers for configuring an investment portfolio,” he says. “Factors like inflation, increased lifestyle and the desire to leave a legacy will all play a role in the construction.”

So, what kind of investments might you consider?

Though not a recommendation to buy and with the caveat that you must check with your financial institution for availability and trading fees, the following funds are examples of what to consider, according Betts. “And, make sure to review the prospectus before making any purchases,” he says.

Bond funds

JPMorgan Ultra-Short Income ETF (JPST)
PIMCO Long Duration Total Return Fund (PLRIX)
Credit Suisse Floating Rate High Income Fund A (CHIAX)

Dividend focused

Dodge & Cox Stock Fund (DODGX)
American Funds Washington Mutual Investors Fund Class A (AWSHX)
Vanguard Value Index Fund Investor Shares (VIVAX)
First Trust Capital Strength ETF (FTCS)


Fidelity OTC Portfolio (FOCPX)
BlackRock Large Cap Focus Growth Inv A (MDLHX)
Vanguard PRIMECAP Fund Investor Shares (VPMCX)

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Securities offered through PKS, Member FINRA/SIPC. Headquartered at 80 State St, Albany NY 12207. Bickling Financial Services, Inc and PKS are not affiliated entities.

Investment Advice offered through Bickling Financial Services, Inc., a registered investment advisor. Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC Headquartered at 80 State Street, Albany, NY 12207. Purshe Kaplan Sterling Investments and Bickling Financial Services are not affiliated companies.