OCEAN CITY — In the reality of the post-recession global economy, goals are changing, expectations are shifting, and static financial strategies, at any age, carry significant risks. Even when you retire, your portfolio will have to meet a host of competing financial objectives. Your goals could include a strategy for guaranteed income, without locking in low interest rates, and growth to outlast your longevity. And of course, you may also be looking for steady cash flow, with enough left over to benefit heirs.
A holistic approach to retirement allocation can take into account your consumption needs and risk tolerance, with the goal of providing ample income for expenses so you can avoid selling investments when values are low. To put it more simply: You should consider creating a strategy with the goal of funding your spending through good times and bad.
To begin developing an allocation strategy, we suggest dividing your total portfolio into short-term consumption and longer-term income replacement. The ideal portfolio should supplement your Social Security and pension income and generate consistent liquidity.
"Think of your short-term consumption bucket as the money you set aside — more liquid investments," says Anil Suri, managing director and head of Investment Analytics at Bank of America Merrill Lynch. High-quality bonds and Treasury inflation-protected securities (TIPS), in addition to FDIC-insured certificates of deposit (CDs), savings and money market savings accounts, are intended to offer stable, planned income with relatively little risk.To generate even more consistent cash flow, consider adding an immediate (or income) annuity that would offer a payment amount guaranteed by an insurance company for the rest of your life. With an immediate annuity, you’ll need to put in a sizable up-front sum to generate meaningful monthly payments. The payments would stop upon death, unless you accept a lower payment amount for a guaranteed period certain. "But the benefit is clear: The payments can keep going, even if you live longer than expected, regardless of market returns," says Sharon Carson, vice president, Personal Retirement Solutions at Bank of America.
The contents of this bucket should be selected with an eye toward generating growth over a longer period to keep pace with inflation and eventually replenish your short-term holdings. "In the short term, you want to take little risk, but in the long term, being too conservative can sometimes result in taking too little risk," says Suri. Having this bucket invested aggressively for potential growth may give you some flexibility in deciding when to sell your assets. You should always keep in mind your own time horizon, investment risk and long-term goals.
One unique way to get access to the market is via market-linked investments securities (also known as structured products). They are technically a type of bond or debt security, frequently issued by financial institutions, some for a fixed term with a principal guarantee if held to maturity, and subject to the claims-paying ability of the insurer. They differ in that their underlying value can be linked to the performance of just about anything, including individual stocks or stock indexes.
Another product that has proven popular is a variable annuity, which allows for market growth potential while still providing income opportunity guaranteed by an insurance company. If you have a variable annuity, the underlying funds would be included in your income-replacement pool, since the principal is invested in equities, seeking growth.
Real estate assets could also be another option for a well-diversified portfolio: An investment property has the potential for significant growth over time, but, as homeowners learned in the recent housing crisis, that time period can be unpredictable at best. So it’s critical to do what-if scenario planning to ensure that you’re not dependent on selling that property to meet expenses, lest you have to unload at a loss.
When choosing assets to round out your long-term portfolio, you also may want to reconsider the way you think about them. Take life insurance. "People consider it an expense, but clients can actually view it as an asset class," says Jim Gothers, Merrill Lynch Wealth Structuring Group. If you have long-term care concerns, there are hybrid products available. The hybrid products are life insurance products with long-term care benefit riders. In the event that you need long-term care, the policy pays income tax-free reimbursements for qualified long-term care expenses. If there is no long-term care need, the life insurance death benefit will ultimately pay income tax-free to your beneficiaries. This is a flexible way to reposition assets to manage the risk of long-term care expenses, while also providing a death benefit to support wealth transfer goals if no long-term care need arises.
The most important factor, notes Carson, is that no single retirement strategy is right for all retirees.
"It’s not all about your portfolio and such considerations as asset allocation, diversification and rebalancing," she adds. "It’s important to think about your life goals and how they could shift at any given time based on circumstance, and then how those goals will impact your financial picture."
(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)