How to Invest When You’re Retired презентация

financial changes
Money stops flowing from your income to your portfolio and starts flowing the other way.

Your investments need to cover short term costs and preserve your long term purchasing power.

“Waiting out” a rough patch in the market or recovering from losses both get tougher to do if you need to sell investments from your portfolio to cover your costs.

your portfolio into three parts based on when you’ll need the money:

Short term: Cash
(Easy to spend, always worth its face value.)

Mid term: Bonds
(Typically better interest than cash to help fight inflation, more certain payouts than stocks to help preserve value.)

Long Term: Stocks
(Opportunity for long term real growth to help the portfolio maintain purchasing power over your lifetime, but far less certainty on any given day.)

Source: pixabay.com

years of expenses

Stocks
Everything else

Each part plays its role:
Stocks: Long term growth potential, though with little short term certainty.

Bonds: Buffer against stock volatility, convert to cash at maturity, and some income along the way.

Cash: Spending money.

you’ll need 25 times the amount of money you expect to withdraw from the portfolio to spend in its first year. At that level, you’re covered by the 4% Rule, a classic rule of thumb in retirement investing.

In essence, the 4% rule says that, if you:
Invest via a well structured, diversified portfolio
Withdraw up to 4% of the portfolio’s value in its first year
Increase your withdrawals every year in line with inflation

…then your money will very likely be able to last for your retirement.

retirement.

Annual household income: $53,000 (about the US median)

They had been saving for retirement, so between no longer paying Social Security taxes and no longer saving for retirement, they think they can live comfortably on 75% of that income level, or $39,750 per year.

They’re expecting about average Social Security benefits, based on a one-wage-earner household:
Employed spouse: $1,328/month ($15,936/year)
Spousal benefit (50%): $664/month ($7,968/year)

The portfolio needs to cover $15,846 in year 1 expenses. We’ll round up to $15,900 for this example to make the numbers easier to follow.

at their normal Social Security retirement age

A solution to Social Security’s long-run funding problems will be found

The couple has no extraordinary expenses or special health risks

When one passes, the surviving spouse’s expenses will decrease by the amount of the smaller Social Security check

Inflation will average 3% per year, about in line with longer term trends

The needed bonds can be bought at prevailing interest rates at par value

$16,900

3 Year Bond: $17,400

7 Year Bond: $19,600

6 Year Bond: $19,000

5 Year Bond: $18,500

4 Year Bond: $17,900

Total Starting Value: $397,500:
25 times the first year’s spending
that the portfolio has to cover.

Important building blocks:
Cash to cover near term expenses

Bonds that:
Mature each laddered year
Will provide the next year’s cash, adjusted for expected inflation
Are laddered deep enough in maturity years to absorb typical market fluctuations over time

Stocks that:
Are enough of a presence so that in a typical market year, some can be sold to reload the top of the bond ladder, while the rest can continue to grow

rungs in your ladder.

Consider high quality bonds like:
US Treasury or Agency Bonds
Insured municipal bonds
A diversified mix of “A” rated or better
investment-grade corporate bonds

Consider intelligently diversified, low-cost stock funds like:
S&P 500 or Total US market index funds
Total World or Total Developed World index funds

Keep your cash liquid and safe: Checking, savings, or money market

Source: pixabay.com

$16,400

Stocks: $255,900

2 Year Bond: $16,900

3 Year Bond: $17,400

7 Year Bond: $19,600

6 Year Bond: $19,000

5 Year Bond: $18,500

4 Year Bond: $17,900

Cash: $16,400

1 Year Bond: $16,900

2 Year Bond: $17,400

3 Year Bond: $17,900

6 Year Bond: $19,600

5 Year Bond: $19,000

4 Year Bond: $18,500

Interest: $36.08

Interest: $99.71

Interest: $167.04

Interest: $215.69

Interest: $268.25

Interest: $304.00

Interest: $343.00

Dividends: $4,875.33

Spent to Cover Expenses

Cash Generated: $6,219.10

Bond Yields based on US Treasuries, Stock Yields based on SPY, as of Jan. 9, 2015

Stocks: $271,254

The starting cash gets spent to cover expenses
The bonds generate interest and get one year closer to maturity
The stocks pay dividends and have a chance to grow

Cash Generated Year 1

Starting Point

Portfolio at the end of year 1, assuming 6% stock gains

$16,900

2 Year Bond: $17,400

3 Year Bond: $17,900

6 Year Bond: $19,600

5 Year Bond: $19,000

4 Year Bond: $18,500

Stocks: $271,254

Generated Cash: $6,219.10

Cash: $16,400

1 Year Bond: $16,900

2 Year Bond: $17,400

3 Year Bond: $17,900

6 Year Bond: $19,600

5 Year Bond: $19,000

4 Year Bond: $18,500

End of Year 1 Portfolio

7 Year Bond: $20,200

Stocks: $257,273.10

Start of Year 2 Portfolio

Use the cash generated by the portfolio and sell some of the stocks to buy back that 7th year of bonds in the bond ladder.

Source: pixabay.com

Repeat the process every year that the stock market has about normal returns, throughout retirement.

Bond: $16,900

2 Year Bond: $17,400

3 Year Bond: $17,900

6 Year Bond: $19,600

5 Year Bond: $19,000

4 Year Bond: $18,500

Stocks: $307,080

Generated Cash: $6,219.10

Cash: $16,400

1 Year Bond: $16,900

2 Year Bond: $17,400

3 Year Bond: $17,900

6 Year Bond: $19,600

5 Year Bond: $19,000

4 Year Bond: $18,500

End of Year 1 Portfolio
(assumes 20% stock gains)

7 Year Bond: $20,200

Stocks: $272,299.10

Start of Year 2 Portfolio

8 Year Bond: $20,800

Source: pixabay.com

If stocks have a great year, sell more from the stock portfolio to add another year to the bond ladder. This increases the buffer against the next market downswing.

Another option:
Add more to each of your existing bond levels & spendable cash.

This would help you protect against faster than expected inflation or see your income increase in real terms.

Bond: $16,900

2 Year Bond: $17,400

3 Year Bond: $17,900

6 Year Bond: $19,600

5 Year Bond: $19,000

4 Year Bond: $18,500

Stocks: $204,720

Generated Cash: $5,000

Cash: $16,400

1 Year Bond: $16,900

2 Year Bond: $17,400

3 Year Bond: $17,900

6 Year Bond: $19,600

5 Year Bond: $19,000

4 Year Bond: $18,500

End of Year 1 Portfolio
(assumes 20% stock losses &
dividends that get somewhat cut)

Stocks: $209,720

Start of Year 2 Portfolio

Source: pixabay.com

If stocks have a bad year, invest the cash your portfolio generated back into stocks, instead of in bonds, and let the bond ladder decrease by a year.

Important Note:
Only invest money in stocks that you don’t need to spend for at least 5 years.

Starting with 1 year of cash & 7 years of bonds gives you some, but not unlimited, flexibility to let the stock market recover from a downturn.

that reduces direct exposure to the interest rate and volatility risks associated with bond investing. It still depends on the bond issuer remaining solvent.

Key ways it reduces exposure to those risks:
Interest is reinvested, rather than used for current income
Bonds are held to maturity rather than sold early
Maturing bonds become the next year’s spending cash
New bonds are bought with expected inflation in mind. The longer term bonds are all bought to mature at higher balances so the next year’s spendable cash increases with expected inflation.

term: Bonds

Long Term: Stocks

No strategy can completely eliminate all risks.

By balancing the risks of different investment classes with the short and long term needs of a retiree, this laddered approach provides a solid chance of success over a retiree’s life span.

and you can too