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Analyze investments to get more out of retirement funds

Posted online

by Rick Imhoff

for the Business Journal

As we approach our retirement age, we begin to look at what we have accumulated for retirement and then come face to face with the reality it will determine our standard of living throughout retirement.

We may find it necessary to work a little longer than planned or to work part-time during the first few years of retirement to provide the level of income required.

On the other hand, we may find ourselves faced with a tempting idea of retiring early because our investments have grown more rapidly than anticipated during the current bull market in stocks. Whatever your situation, there are a few things you should do to get the most out of your investments for retirement.

The first step is to determine how much money you need to accumulate to provide the additional income above your Social Security, pension and other retirement benefits to maintain the standard of living you wish to enjoy during retirement.

This analysis begins with a look at your current budget, adding in new expenses you will have once you retire, such as more travel, long-term care insurance or larger gifts to your children. You will also subtract expenses that will be reduced or eliminated at retirement, such as mortgage payments, credit-card payments or college tuition.

Once these adjustments are made, a calculation can be done that factors in inflation, a rate of return on the investments you currently have saved for retirement, additional savings between now and your retirement date, and the length of time your retirement years will last.

This calculation will arrive at a sum of money needed at your anticipated retirement age to provide the level of income you desire.

Once you establish the amount you need for retirement, it is important to not get too conservative with your funds just prior to and after your actual retirement.

Many people within 10 years or fewer of retirement make the mistake of placing most or all of their investment vehicles in relatively short-term investments without any growth potential. Even with the low inflation rate of 2.5 percent today, this type of investment strategy could cause problems a few years into your retirement.

One strategy to help maintain your standard of living throughout retirement is to have at least a 40 percent to 60 percent exposure to investments geared toward growth during the 10 to 15 years from your retirement date. Once you reach retirement, that exposure can be reduced to 30 percent to 40 percent at a minimum.

This exposure to growth should add an additional 2 percent to 4 percent annually (based on long-term historical averages) to the average rate of return on your entire investment portfolio and help provide an increasing level of income that keeps pace with inflation.

This exposure to growth can be accomplished by purchasing a dozen or two large-cap stocks that have good prospects for the long term. These stocks would act as the core of your growth holdings. If you don't have the time or inclination to do the necessary research, you can purchase a mutual fund or two that invest in similar types of stocks.

Another strategy would be to extend the average maturity of your fixed-income holdings. For example, instead of buying CDs and bonds that mature in one or two years, consider laddering the maturities by purchasing them in equal amounts at equal intervals so that the longer maturities may go out five or 10 years. This extension of the average maturity will help to increase your interest income and also reduce the volatility of your income during times of changing interest rates.

One other strategy would be to reduce the amount you maintain for emergencies. This amount should not exceed 3 to 6 months of your expenses. The excess should be invested in longer maturities or included in the growth portion of your portfolio. This will make more of your money work harder and potentially provide a higher level of retirement income.

Of course, you always hear that you should save as much as you can. Even with just 10 years left before your retirement date, saving an additional 1 percent or 2 percent of your pay can add up for your retirement. If you invest this extra savings in an IRA or 401(k) plan, you get the additional benefits of tax deferral and an income tax deduction.

The most important thing to remember is that your retirement years may be as long as your working years. So, just because you retire doesn't mean your investment portfolio should do the same.

(Rick Imhoff is a Certified Financial Planner and trust officer with Empire Bank in Springfield.)

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