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Financial Briefs


Investing Before and During Retirement


here are two phases in the life cycle of a retirement portfolio: the time when you’re contributing to it and the time when you’re using it to cover your living expenses. During each phase, the basic challenge is deciding how to invest your nest egg, and for that there are three common approaches: • Going  with  your  comfort  level. Most people have some idea as to what investments appeal to them, either because of the rate of return they associate with them or how much safety they seem to offer. Whichever it is, people tend to pile their retirement funds in one place — which can cause problems if there is a significant decrease in that investment. • Using  a  “one-size-fits-all”  formula. There are at least several of these “formulas” floating around. On the theory that the closer you get to retiring the more conservative you should become, one says you should subtract your age from 100, treat the result as a percentage, and put that portion of your portfolio in stocks and the rest in bonds. Another follows the same method, but suggests you subtract your age from 120. The appeal of this approach is that it’s

simple and unambiguous. The downside is that the results don’t take into account the details of your circumstances, the state of the economy and inflation, or the cyclical nature of market returns. • Using  a  financial  plan. A plan includes all the details that the other two methods leave out. It’s by far your best bet for achieving your retirement goals since it takes your circumstances and the state of the economy into account. The plan should be split into before-retirement and during-retirement strategies.

Before You Retire The key factor is to determine what rate of growth you need to achieve in your portfolio to retire with a nest egg capable of supporting you for the rest of your life once you no longer earn a paycheck. It’s a balancing act between how much you can afford to put aside every year, how much growth will maximize your nest egg, and how much risk you feel comfortable taking. By analyzing these factors, a good financial plan produces a recommended asset allocation strategy that specifies how much of your Continued on page 2

Your Plans for Retirement


ow much will you need to live a comfortable retirement? It’s a question that can’t be answered without giving serious thought to how you really want to spend your retirement. Retirement is no longer viewed as a time to slow down, but is now considered a new beginning in life. Thus, your current living expenses may have little to do with your retirement expenses. However, keep in mind that retirement often proceeds in stages, with different spending trends in each stage. The three basic phases are:

• An active phase, when the retiree is in good health and actively pursues travel and hobbies. This is typically the most expensive retirement phase. • A passive phase, when the retiree’s energy starts to wane. Life starts to slow down, and living expenses typically decrease. • A final phase, when medical conditions often result in subsistence living. This is typically a more expensive time than the passive phase due to increased medical expenses, but as long as proper Continued on page 3

Copyright © Integrated Concepts 2011. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.



Investing Before Continued from page 1

portfolio should be invested in stocks, bonds, cash, commodities, and real estate. The mix you invest in aims at a target rate of return and risk level that both meets your goals and makes you comfortable with the year-to-year results. In general, the younger you are, the more risk you can afford to take since you will have many market and economic cycles to smooth out your returns. It’s not unheard of for someone in his/her 30s or 40s to invest up to 70% or 80% of his/her assets in stocks. Conversely, younger people who are risk averse may be able to take less risk and put more of their assets in CDs and bonds, as long as they have more modest retirement goals. It’s generally true that the closer you are to retiring, the more conservative your portfolio ought to be. But this doesn’t suggest the precise proportions that you ought to put into each asset class, nor does it take into account the opportunities or challenges that current market conditions present. Those answers will come only when you get into the details of your current situation and your future goals.

After You Retire Before you retire, your asset allocation strategy is driven largely by the goal of creating the largest possible retirement portfolio within the limits of your tolerance for risk. After you retire, the goal shifts to keeping your retirement portfolio large enough to continue generating the supplemental income you need for the rest of your life. While this shift means your strategy aims for less growth and risk than in the accumulation stage, it’s usually a mistake to revert to the most conservative strategy possible. That’s because your portfolio gets eroded over time by: • Inflation, which means the real value of your portfolio (as well as the buying power of the income it throws off) gets smaller every year.

Taking the Plunge: When Should You Retire?


ost people know instinctively that deciding when to retire is one of the most important life decisions they’ll ever make. What most people don’t know, however, is how to actually make that decision. The “traditional” retirement age is 65. But some people want to retire early, say, at age 55. Others look at how much they’ll get from Social Security — benefits begin at age 62, but the longer you delay, the more it pays out. Then there’s the matter of your retirement portfolio — with many retirement portfolios lower than they were a few years ago due to stock market fluctuations, many people are wondering if they might have to put off retiring far longer than they had expected. The most important question to answer is: how many years can you afford the lifestyle you want in retirement? The worst thing that can happen is that you run out of money in retirement. The best idea is to work with a qualified financial planner to answer this question. But to give you an idea of what’s involved in making that decision, here’s a summary of the main considerations: What  is  your  lifestyle  going to  cost  in  retirement? This is the most basic parameter to determine. Is your house paid off? Are you going to travel and entertain frequently? Do you want to own two homes, one in a warmer climate for the winter and a cooler one for the summer? What will the cost of living be in each of those places? What kind of uncovered medical expenses do you expect? Start by putting together

• Taxes on income and capital gains in taxable accounts and withdrawals from non-Roth IRAs. • Withdrawals that you make to support your lifestyle. Because of this constant shrinkage, some portion of your portfolio

an annual household budget for all of your expenses. What  sources  of  income  will you have? Will it be only Social Security, or will it include other regular payments, like from a pension, consulting or self-employment, rental income, royalties, and the like? How  much  do  you  have  accumulated,  and  what  annual  income can  you  generate  from  it? Sources of retirement savings often include IRAs, 401(k) plans, and taxable accounts. Will  your  income  cover  your expenses? If so, you might be able to retire at the age you project. If the rate at which you withdraw money from your retirement portfolio is too high, however, you run the risk of depleting those resources before you die, which will likely result in making some very uncomfortable adjustments to your lifestyle. If you determine that your income won’t cover your expenses, there are three solutions: • Delay retiring while you add to your personal savings and increase the amount you can collect from Social Security. • Change the investment mix in your portfolio to potentially increase your rate of return. • Aim for a less-expensive retirement lifestyle. A thorough financial plan runs through all of these calculations and aims at a realistic answer to the question of when you should retire, based on all the details of your finances and the level of risk that’s appropriate for you. Please call if you’d like help with this decision. zxxx

needs to be invested in stocks, which is a riskier asset class but the only one that typically stays ahead of inflation, taxes, and reasonable rates of withdrawals. Please call if you’d like to discuss your situation. zxxx FR2010-1214-0015


Your Plans Continued from page 1

medical arrangements have been made, probably not as expensive as the active phase. To help you visualize your retirement so you can estimate retirement expenses, consider these questions: • When do you want to retire? Will you realistically have the resources to retire at that age? • Do you plan to stay in your current home, trade down to a smaller one, or move to a different city? If you plan to move, is the cost of living more or less expensive than your present city? Have you made extended trips to the new location during different seasons to make sure you’ll enjoy living there? • Will your mortgage be paid off by retirement? What about other debts? • Will you continue to work after retirement? If so, will you work part-time or full-time? Where will you work, and how much can you expect to earn? Do you have any hobbies or interests that can be turned into paying jobs? Are you planning to start a business after retirement? • How will you spend your free time? What hobbies will you pursue? How often and where will you travel? How much will all these activities cost? • How will you pay for medical costs? Will your employer provide health insurance, or will you need to purchase insurance to supplement Medicare coverage? • Do you have any medical conditions that are likely to impact your quality of life in retirement? What would you do if you became physically disabled? Would your spouse take care of you, would you move in with your children, or would you go to a nursing home? How will you provide for long-term-care costs? • How much of your income will be provided by personal investments, including 401(k)


Managing Withdrawals in Retirement


even with inflation and supports your ability to continue to withdraw 4% a year indefinitely, as long as your portfolio keeps growing and inflation remains at the same average rate. However, on a year-to-year basis, market returns and inflation fluctuate. Sometimes, as we’ve seen recently, market returns are negative. If you want to avoid shrinking the real value of your portfolio in these circumstances, you ought to adjust how much you take out of your portfolio for spending purposes. But does that mean when your accounts lose money in a bad stock market year you shouldn’t withdraw any money from them? Strictly speaking, the answer is yes, but that’s not always realistic. If it means forgoing some luxuries or putting off some discretionary expenses, holding off on withdrawals when market returns are below average might make good sense. If it means that you’re forced to cut back on necessities, you may have no choice but to take out the money you need. But then ask yourself: does that mean that your lifestyle is more expensive than you can really afford? Or that you need to alter your asset allocation in favor of highergrowth investments? Whatever the case, it’s to your advantage to have a financial plan for retirement — and revisit it at least once a year. Please call if you would like to discuss this in more detail. zxxx

investments? Are you confident you can invest so those investments will last your entire retirement? How much of an investment loss could you tolerate without changing your retirement lifestyle? • What would happen financially if your spouse dies? If you die,

would your spouse be able to support himself/herself financially? Answering these questions should give you a clearer picture of what your retirement will be like. If you’d like to review these questions in more detail, please call. zxxx

nce you’ve retired, you begin a balancing act between two imperatives: withdrawing enough from your retirement portfolio to cover your expenses and not taking out so much that you run out of money. So how do you get the rate of withdrawal that is just right? Over the years, there’s been a general rule of thumb: keep your withdrawals to between 4% and 6% of your total portfolio a year. Now that the past few years in the stock market have taken such big chunks out of so many portfolios, some pundits are recommending reducing that rate of withdrawal to 3% to 3.5% a year. While you will still want to consider your circumstances, these general rules of thumb point out that the appropriate rate at which you should take money out of your accounts is much smaller than many people imagine. Just as with every other issue related to retirement planning — like how much you should put away per year, how it should be invested, and when you can afford to retire — the withdrawal rate that’s right for you can only be determined by a sound financial plan. But right off the bat, it’s safe to say that whatever that rate is, ideally it should be less than the annual rate of growth your portfolio achieves, minus the rate of inflation. For example, if your expected average rate of return is 7% and you use the long-term average of about 3% for inflation, the maximum you should take out of your nest egg is 4%. This leaves the remaining 3% growth to keep your portfolio value

4 18-Month Summary of Dow Jones Industrial Average, 3-Month T-Bill & 20-Year Treasury Bond Yield October 2009 to March 2011

Business Data

# — 2nd, 3rd, 4th quarter @ — Dec, Jan, Feb Sources: Barron’s, Wall Street Journal Past performance is not a guarantee of future results.


3-Month & 20-Year Treasury

12 10

Dow Jones Industrial Average

13000 12000 11000 10000


9000 6

20-Year Treasury Bond

4 2

8000 7000 6000

3-Month T-Bill



Dow Jones Industrial Average

Month-end Jan-11 Feb-11 Mar-11 Dec-10 Mar-10 3.25 3.25 3.25 3.25 3.25 0.16 0.15 0.10 0.18 0.15 3.42 3.60 3.29 3.37 3.68 4.32 4.45 4.18 4.23 4.43 3.83 3.87 3.85 3.89 4.33 +1.70 +2.60 +3.10 +3.10 +2.20 Month-end % Change Indicator Jan-11 Feb-11 Mar-11 YTD 12 Mon Dow Jones Industrials 11891.93 12226.34 12319.73 6.4% 13.5% Standard & Poor’s 500 1286.12 1327.22 1325.83 5.4% 13.4% Nasdaq Composite 2700.08 2782.27 2781.07 4.8% 16.0% Gold 1327.00 1411.00 1439.00 2.4% 29.0% Unemployment rate@ 9.40 9.00 8.90 -9.2% -8.2% Consumer price index@ 219.20 220.20 221.30 1.1% 2.1% Index of leading ind.@ 112.20 112.50 113.40 1.9% 4.9%

Indicator Prime rate 3-month T-bill yield 10-year T-note yield 20-year T-bond yield Dow Jones Corp. GDP (adj. annual rate)#

4000 3000

O N D J F M A M J J A S O N D J F M 2009 2010 2011

News and Announcements From the Alexander Household I take some things for granted. The biggest example is my car, which was stolen recently. A couple of friends asked why anyone would steal a minivan, which is a good question. We were in limbo for a couple of weeks, not knowing if we would get our van back. It was not found, and we have replaced it. In the end, we were treated well by the insurance company, rental car company, and the car dealership. Another example was an ill-fated attempt to do an aerial cartwheel that resulted in a pulled hamstring muscle. I have always had considerable flexibility due to gymnastics and dance, but the years and four smiling children in the family photo have taken a toll. As I drive my new car and attempt to recover from a month of discomfort and focus on exercises to regain a semblance of the flexibility that I used to take for granted, my goal is to appreciate the things that I have instead of noticing only after they are gone.

Carol Ringrose Alexander, CFP®, AIF®, CDFAT M

From the Thurman Household Levi is doing great. We had the parent/ teacher conferences. Six different teachers talking about six different kids…Levi. Levi informed the math teacher the area of a shape was impossible to calculate with the dimensions she drew, according to Dad (true). When she challenged this, Levi informed her that I had an engineering degree (also true). I don’t think she was impressed but asked me to show her why it was impossible, which I felt boxed in to do. She agreed, but said it was “close.” Not really. Not sure how you calculate the dimensions of an object when it can’t exist. We had a good spring break. We went to our house in Stillwater and relaxed, watched movies, worked a little on math (on solvable problems), threw the football, rode the unicycle, threw the football while on the unicycle (Levi), had some father/son chats, etc. My dad gave Levi a driving lesson, right-hand turns and driving on country roads. All did well. Life is good. I’m still running, but my times have not improved in awhile. I guess I have hit a plateau. Have a great month!

Randy Thurman