Monday, August 12, 2013

A Retirement Financial Strategy

Over the past couple months, I have been reconsidering my original strategy of living entirely off investment income in retirement.  The Great Recession has shown me the tremendous volatility and uncertainty of a 100% investment income strategy.  So I've started to consider how to develop stable retirement income streams and the level of cash to maintain in an emergency fund.

Assuming our current expenses, here's how I expect the percentage each income stream can cover.

  • Dividends and interest - 21-25%.  This is a minimum percentage based on the dividends my company stock will pay when I withdraw it from my company profit sharing plan through an NUA.  I can increase this amount by buying some additional dividend paying stocks.

  • Rental Property - 21-42%.  This the expect range of the net income from a real estate partnership I inherited from my parents.   Historically, it has been at 42%, but lately there have been expenses and vacancies that have reduced the net income by half.

  • Social Security -  40-50%.   This assumes I start taking payments at 62, which is still a few years away.  I was surprised that Social Security would cover such a high percentage of our expenses.

  • Annuity -  0% for now.  Based on the above three elements, I shouldn't need an annuity.  I will reconsider if the actual percentages for the other three fall below the minimum of the range.  But I expect that investment income will be able to make up the deficit in most cases.

  • So the range of living expenses I can cover with stable income streams is 82% to 117%, which is a reasonably good level and above the minimum 70% target.   However, there are several caveats.  First, the rental property net income is not guaranteed since vacancies and maintenance expenses can both increase.  Second, Social Security benefits may be modified, although I am above the age of 55, for which benefits are held constant even if the program is changed.  Third, our expenses are going to increase by 10-20% over the next few years.

    For an emergency fund, I am considering keeping 5 years of my pre-retirement salary in cash or cash equivalents in taxable savings accounts (i.e. not IRA).  Currently, we are at about 3 years worth of cash. Once I reach 59-1/2, I will include the cash in our IRA accounts since I will be able to withdraw from my accounts with no penalty.

    The remaining balance, I will put into either my ETF investment strategy, managed accounts or individual stocks and hopefully, earn 6-7% annualized returns.

    For more on Strategies and Plans Idea, check back every Monday  for a new segment.

    This is not financial, retirement or investment advice. Please consult a professional advisor.

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