The first is to have a pool of very liquid assets to fund two to three years of retirement spending; this may keep you from selling longer-term assets at an inopportune time. Through time, and depending upon market conditions, you may have the opportunity to replenish this cash reserve using gains from your retirement portfolio.
Another complementary strategy is to integrate annuities. This can help shift the risk of market volatility off your shoulders and onto the issuing insurance company.
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).
Until retirement, portfolio optimization largely focuses on the blending of different asset classes in the appropriate measure to create optimal portfolios. But in retirement, investors must integrate different retirement investment vehicles to enhance income and manage risk.
One of the industry’s leading thinkers, Ibbotson Associates, has done a great deal of research around this very idea.
In a landmark study, “Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit,” Ibbotson’s research came to several key conclusions that hold important ramifications for meeting the retirement-income challenge.
One of the study’s conclusions was that the addition of a variable annuity with a guaranteed minimum withdrawal benefits retirement portfolios—replacing cash or fixed-income allocations. It increases total income while it decreases risk.1
A successful retirement is so much more than undertaking sound investment strategies. It also requires understanding the “sequence of returns” danger and taking measures to mitigate the risk.