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It’s vital that your nest egg last longer than you do. The only
way for that to occur is if the nest egg continues to grow over
time. If you take out more than you earn you are guaranteed to
run out of money at some point. If your nest egg continues to
grow, though, it will always last longer than you.
Last week, I talked about the two financial issues that must be
dealt with in retirement. The first is how much money you can
receive on a monthly basis. The second issue is how long you
will live. (Read that article at www.guardingyourwealth.com) The
bottom line is that you need your income and your nest egg to
continue increasing throughout your life.
I believe it’s possible to do this by making a few, simple
adjustments in the way you view retirement investing.
Specifically, when it comes to managing their retirement
portfolio, a retiree needs to think in terms of ‘cash-flow’
instead of ‘income’.
Many find the decision to retire a very difficult one to make.
Not having to ‘punch the pay clock’ every day is certainly
appealing. The realization that there won’t be any more company
pay checks is frightening.
When a retiree thinks of replacing that paycheck he or she
typically thinks in terms of income. “The pay check provided
income. Since I’ll no longer receive the pay check, I instead
need to replace it with income from my investments.”
Retirees want to keep their principal intact, so they need to be
able to earn enough interest to live off of, right? Wrong.
From an investment point of view, income is thought of in terms
of the interest. Investments that generate interest include
things like certificates of deposit, government bonds and
corporate bonds. On the other hand, investments such as stocks
and real estate are thought of as growth investments.
Traditional financial planning confuses the terms ‘safe’ and
‘stable’ when it says you should transition your portfolio from
a growth focus to an income focus. That means increasing the
bond portion of the portfolio and decreasing the stock portion.
That’s also why the traditional approach is typically only able
to generate a 4% income stream.
This thinking is flawed. Which is ‘safer’ over the next 40
years—a portfolio that continues to grow and that allows you to
have a higher level of increasing income or one that only grows
enough to allow you to barely get by? The second one is more
‘stable’ because it doesn’t fluctuate as much, but that
stability might mean running out of money.
‘Cash flow’ is different than income. Cash flow focuses more on
the ability to continue to steadily deliver monies to replace
that paycheck. But it’s not tied to certain types of
investments.
Picture a bucket with a small hole in the bottom. If there is
enough water in the bucket, the water flowing out the bottom can
continue without additional water being added. As long as
additional water is added in time, the outward flow doesn’t
change. That’s ‘cash flow.’
Now, think of a money market account as your retirement bucket.
Each month a pay check can be electronically transferred into
your daily checking account. As your money manager, my job is to
manage the portfolio such that I refill the ‘bucket’ when
needed.
That freedom allows me to use investments that should provide a
higher rate of return, such as stocks and real estate, but where
the return may come more from an increasing share price instead
of interest. When it comes time to replenish the bucket, I can
determine where to get those funds based on market, economic and
performance conditions.
I mentioned Joe in my last article. The key to providing Joe his
paycheck while growing his portfolio is that I don’t have to put
most of his money into interest-type investments. Instead, I
manage his portfolio to generate a higher overall rate of
return.
Using these techniques, a properly managed portfolio should be
able to sustain a withdrawal rate of around 7% while still
growing the nest egg. But it must be managed properly. You can
apply these same principles yourself, and it’s easier than you
think. Contact me for a free special report that explores that
issue.
Nationally-syndicated financial columnist and Certified
Financial Planner® Jeffrey Voudrie provides personal, in-depth
money management services and advice to select private clients
throughout the USA. He’ll answer your financial question – FREE
at www.guardingyourwealth.com.
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