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Retirement Stage Portfolios Require Different Approach Than Accumulation Stage Portfolios

June 30, 2012 | Comments: 0 | Views: 171

A common mistake that I see a lot of retirees making is managing their portfolio the same way in retirement as they did before they retired. What's wrong with that, you say? Well, I believe that portfolios in the retirement stage of your financial life should be managed differently than portfolios in the accumulation stage of your financial life because usually a retiree has a different objective of their money than someone who hasn't retired yet.

First let's define what the three stages of your financial life are: first there's the accumulation stage, then comes the retirement stage, and the last is the distribution stage.

1. The accumulation stage begins from the time you start accumulating money until you retire. For most people, that accumulation comes from saving a portion of their income from their job or business income. A few will also receive money that they are able to save from other sources such as gifts or inheritances. Of course, you can also continue to accumulate savings after retirement, but the bulk of savings accumulation usually comes during their working years prior to retirement.

2. The retirement stage begins when you stop working full-time and begin to receive any pension and/or Social Security benefits, and start using some of your retirement savings to supplement your income. The retirement stage ends when you die.

3. The distribution stage begins when you die and ends when all of your personal and financial assets have been distributed to others. For most people, those "others" are primarily their heirs (either named in a will or trust document or according to their state's intestate laws). However it must be noted that "others" can also be intended entities, such as a favorite charity (or charities), or can also be unintended entities, like the IRS or your state for various taxes that become due.

So, now that we know what the different stages are, why should portfolio management be different during the retirement stage than it is during accumulation? The answer is that retirees typically have a different objective for their money during the retirement stage than they had during the accumulation stage.

Think about it. During the accumulation stage, the focus is on getting your money to grow at the highest rate of return possible (considering the risk levels of course). But the point is that the focus during accumulation is on the rate of return.

During the retirement stage, things change because the focus is now on receiving an income from their savings and investments to supplement their income from Social Security and pensions. In other words, the focus is on receiving a return of their money, not the rate of return of their money. That's a huge difference.

Since the focus of managing a retirement portfolio is on the income being received from the portfolio, another often overlooked factor is how long the income will last. This is where I see major mistakes being made. Too many "traditional" financial advisors and retirees who self-manage their portfolios treat a retirement-stage portfolio just like an accumulation-stage portfolio, and don't build in protections for the possibility that a retiree or their spouse might outlive their retirement assets.

When you set up a retirement portfolio improperly with a focus on the rate of return being received, rather than the return of money needed, you run a significant risk that actual rates of returns received don't keep up with projected rates of returns, and that the withdrawal rates actually taken exceed a sustainable rate. The result is that a retiree that outlives their life expectancy runs a high risk of running out of money during his or her lifetime, with the only income left being from Social Security and any pensions they might have.

The solution is to design a retirement income portfolio with the primary focus being on a return of the retiree's money in the form of a guaranteed, predictable income that can never be outlived, regardless of how long the retiree lives. We have found that the best way to accomplish this type of portfolio is with an appropriate mixture of a traditional portfolio with an annuity or a portfolio of annuities that provide guaranteed lifetime income.

G. Marvin Bales, CPA, CFP® is a financial planner, investment advisor representative and owner of GMB Financial, LLC. He specializes in working with retirees and pre-retirees in designing retirement income portfolios that provide a guaranteed income that can never be outlived, including a specialty in maximizing the benefits received from Social Security.

Mr. Bales welcomes clients and prospective clients from across the United States to learn more by visiting his website at http://www.gmbfinancial.com or calling 864-282-8900.

Investment advisory services offered through Legacy Investment Management, LLC, a registered investment advisor. GMB Financial, LLC and Legacy Investment Management, LLC are related companies.

Source: EzineArticles
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