Following a seven-year bull market in real estate and stocks, most of us have watched our home values and retirement accounts increase in value during this period. Regardless of whether you are in the midst of your peak earning years or just wondering where you stand financially, it would be wise to pause and measure progress towards your personal financial goals.
In How to Turn Assets Into Income: Part 1, we highlighted common questions, concerns, and considerations that help answer this question many want to better understand. A case study was also provided as a simple example of a retirement income strategy.
Individual investors often ask me whether their hard work and savings will produce enough lifetime income in the future. This is a critical issue we discuss with our clients. For those of you who do not have a financial advisor, you can run some of your own analysis with available online tools. A nice resource that allows you to start running various retirement scenarios is NewRetirement . They also provide a lot of great answers to common questions related to needs you may have in the future.
What Should Your Asset Allocation Be?
Beyond just maintaining financial discipline (saving, budgeting, investing, etc.), the real answer may be in how to properly position your assets across the right types of accounts and solutions for the future. Many of us have a 401k, a brokerage account, and our primary residence, however, to maximize income in the future it will likely require a lot more effort.
For example, the following chart highlights several asset allocation options that should be evaluated during your own financial planning process (you can click on the chart to enlarge):
So, what are you missing?
If there are some solutions that don’t relate to your situation, its not necessarily a bad thing as you just may not need them. Most of you have some mix of qualified, non-qualified, and real estate assets, but we also know from experience that many investors have not explored other tax-deferred or private solutions. These strategies can provide an opportunity to better position their asset allocation for retirement.
Tax-Deferred, Alternatives, and Closely Held Investments
For example, some tax sensitive investors may use tax-managed mutual funds or even municipal bonds. However, many are unaware that cash value life insurance can provide tax diversification benefits while also providing a flexible income source. I know life insurance is a black box to some. Here is a nice educational blog entry from one of our strategic partners, WealthPoint, which discusses Life Insurance Basics.
Another solution we’ve heard about is annuities. Some investors use immediate annuities when they don’t want to take market risk and prefer safety first. Others use deferred income annuities to hedge longevity as well as to use it to pay for potential long-term health care needs. This is a common question we receive on how to best coordinate these solutions with the rest of your portfolio.
Private equity or alternatives are not as widely used by investors. However, for some they can provide not only a way to reduce overall portfolio risk, but also generate additional retirement income both now and in the future. There are certain requirements to invest in these instruments, and it is also a good idea to fully understand how one of these strategies will align with your income goals. Small business or closely held investments can be a way to build equity over time. In addition, they may require additional guidance and advice when looking to liquidate and convert to income. Its also important to beware of tax implications.
Overall, a more structured and comprehensive asset allocation strategy provides greater flexibility as well as tax diversification. Our view is that when implemented properly, it can also increase your probability of maintaining sustainable lifetime income in the future.
In Part 3, we will share how and when specific strategies should be implemented just prior to retirement.
As always, we are here to help.