BY CHRIS HANLY
INVESTMENT CONSULTANT, GARY GOLDBERG FINANCIAL SERVICES
The retirement challenge has always been the same – generating sufficient income for the rest of your life, while taking on little risk and beating inflation. Over the past few years, this has not been all too difficult as markets have risen sharply since the end of the financial crisis and inflation has been subdued. However, today, the environment is rapidly changing and become more complicated. For the second year in a row, it appears that stock market returns will be tepid at best. And while overall inflation is likely to remain subdued, the cost of living due to higher taxes, increasing medical costs and higher insurance premiums should be counted on. All in an environment where fixed income opportunities from bond investments will likely remain well below their historical averages as interest rates are expected to remain near current levels for years to come.
In my experience, in working with hundreds of retirees and pre-retirees, many expect their income needs to drop to 60% – 80% of their pre-retirement income. While this is plausible, I caution against this, as some costs will rise to offset the savings from eliminating your daily commute and work related expenses. A good starting point is to determine where your retirement income will come from and with what predictability. For many, social security is the cornerstone of their retirement income – after all it is both predictable and ‘guaranteed.’
Second comes income earned from pensions, which unfortunately are becoming rarer and almost an exception. Then there is your 401(k), a lump sum you have saved over years and are now going to become a major source of future income. So far, I haven’t revealed anything striking or different from what you probably already know. Now, however, comes the innovation of our proprietary Montebello Process. The Montebello Process utilizes a needs based, time weighted approach to help build a road map for generating a reliable retirement income. By segmenting your investments into short-term, intermediate-term and long-term assets, we are better able to manage the risks in your portfolio while increasing the probability that your income will outlive you as opposed to you outliving your income – something every retiree should be greatly concerned with.
Here’s how it works: Let’s assume you are retired, have $600,000 in a 401(k), $150,000 in a joint account with your spouse and need about $60,000 per year to live.
• Step 1 – determine when to take social security, including spousal benefits and what they amount to.
• Step 2 – determine how much from your joint account you need to ensure 3 years’ worth of income ($180,000 – tax adjusted, minus 3 years of social security income)
• Step 3 – forecast inflation expectations and build a portfolio that is designed to provide some growth, enough to outpace inflation, and sustainable income. For this we often recommend a portfolio comprised of high-quality dividend-paying stocks.
• Step 4 – allocate your 401(k) portfolio to afford some liquidity, long-term growth and future income. This may be done in various ways, including the use of managed variable annuities that provide a lifetime income guarantee.
Most significantly, investors need to mentally prepare themselves that parts of their portfolios will inevitably underperform other parts, and that ultimately, the shorter term portfolio will be depleted and replaced with the intermediate term ‘basket’ – in other words, 10 to 12 years from now your intermediate-term portfolio becomes the short-term portfolio.
Depending on your investment experience and financial knowledge some of this may seem overwhelming. Don’t let that become a road block, when it comes to retirement, lack of planning and inaction are all too often the biggest reason for failure.
Christopher Hanly is an investment consultant with Gary Goldberg Financial Services in Suffern and can be reached at (845) 368-2907 or [email protected]