A
way to help you prepare.
Provided by Taylor McClish
The baby boomers
redefined everything they touched, from music to marriage to parenting and even
what “old” means – 60 is the new 50! Longer, healthier living, however, can put
greater stress on the sustainability of retirement assets.
There is no easy
answer to this challenge, but let’s begin by discussing one idea – a bucket
approach to building your retirement income plan.
The Bucket
Strategy can take two forms.
The
Expenses Bucket Strategy: With this approach, you segment your
retirement expenses into three buckets:
* Basic Living
Expenses – food, rent, utilities, etc.
* Discretionary
Expenses – vacations, dining out, etc.
* Legacy
Expenses – assets for heirs and charities
This strategy
pairs appropriate investments to each bucket. For instance, Social Security
might be assigned to the Basic Living Expenses bucket. If this source of income
falls short, you might consider whether a fixed annuity can help fill the gap.
With this approach, you are attempting to match income sources to essential
expenses.1
The guarantees
of an annuity contract depend on the issuing company’s claims-paying ability.
Annuities have contract limitations, fees, and charges, including account and
administrative fees, underlying investment management fees, mortality and
expense fees, and charges for optional benefits. Most annuities have surrender
fees that are usually highest if you take out the money in the initial years of
the annuity contact. Withdrawals and income payments are taxed as ordinary
income. If a withdrawal is made prior to age 59½, a 10% federal income tax
penalty may apply (unless an exception applies).
For the
Discretionary Expenses bucket, you might consider investing in top-rated bonds
and large-cap stocks that offer the potential for growth and have a long-term
history of paying a steady dividend. The market value of a bond will fluctuate
with changes in interest rates. As rates fall, the value of existing bonds
typically drop. If an investor sells a bond before maturity, it may be worth
more or less than the initial purchase price. By holding a bond to maturity an
investor will receive the interest payments due, plus their original principal,
barring default by the issuer. Investments seeking to achieve higher yields
also involve a higher degree of risk. Keep in mind that the return and
principal value of stock prices will fluctuate as market conditions change. And
shares, when sold, may be worth more or less than their original cost.
Dividends on common stock are not fixed and can be decreased or eliminated on
short notice.
Finally, if you
have assets you expect to pass on, you might position some of them in more
aggressive investments, such as small-cap stocks and international equity.
Asset allocation is an approach to help manage investment risk. Asset
allocation does not guarantee against investment loss.
International
investments carry additional risks, which include differences in financial
reporting standards, currency exchange rates, political risk unique to a
specific country, foreign taxes and regulations, and the potential for illiquid
markets. These factors may result in greater share price volatility.
The
Timeframe Bucket Strategy: This approach creates buckets based on
different timeframes and assigns investments to each. For example:
* 1 to 5 Years:
This bucket funds your near-term expenses. It may be filled with cash and cash
alternatives, such as money market accounts. Money market funds are considered
low-risk securities but they are not backed by any government institution, so
it’s possible to lose money. Money held in money market funds is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Money market funds seek to preserve the value of your investment at
$1.00 a share. However, it is possible to lose money by investing in a money
market fund. Money market mutual funds are sold by prospectus. Please consider
the charges, risks, expenses, and investment objectives carefully before
investing. A prospectus containing this and other information about the
investment company can be obtained from your financial professional. Read it
carefully before you invest or send money.
* 6 to 10 Years:
This bucket is designed to help replenish the funds in the 1-to-5-Years bucket.
Investments might include a diversified, intermediate, top-rated bond
portfolio. Diversification is an approach to help manage investment risk. It
does not eliminate the risk of loss if security prices decline.
* 11 to 20
Years: This bucket may be filled with investments such as large-cap stocks,
which offer the potential for growth.
* 21 or More
Years: This bucket might include longer-term investments, such as small-cap and
international stocks.
Each bucket is
set up to be replenished by the next longer-term bucket. This approach can
offer flexibility to provide replenishment at more opportune times. For
example, if stock prices move higher, you might consider replenishing the
6-to-10-Years bucket, even though it’s not quite time.
A bucket
approach to pursue your income needs is not the only way to build an income
strategy, but it’s one strategy to consider as you prepare for retirement.
Taylor McClish may be reached at (503) 239-3060 or Taylor.McClish@cunamutual.com
This material was prepared by MarketingPro, Inc., and does not
necessarily represent the views of the presenting party, nor their affiliates. This
information has been derived from sources believed to be accurate. Please note
- investing involves risk, and past performance is no guarantee of future
results. The publisher is not engaged in rendering legal, accounting or other
professional services. If assistance is needed, the reader is advised to engage
the services of a competent professional. This information should not be
construed as investment, tax or legal advice and may not be relied on for the
purpose of avoiding any Federal tax penalty. This is neither a solicitation nor
recommendation to purchase or sell any investment or insurance product or
service, and should not be relied upon as such. All indices are unmanaged and
are not illustrative of any particular investment.
Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America.
Citations.
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