Key Points

• Factor In the Variables
• Keep Stocks Working for You
• A Focus on Yield
• Now That You’re Retired, Maximize Your Retirement Income
• Your Retirement Distribution
• Components of Total Return
• Donate Appreciated Assets to Generate Income
• Develop a Strategy for Income and Growth
• Points to remember

Those long-awaited Golden Years have arrived and you’re enjoying a well-deserved retirement. You’ve saved and invested wisely to provide a financial cushion, but making the most of your assets now — maximizing your retirement income — may require a brand new strategy. Where do you go from here?

Factor In the Variables 

Investing during retirement can be uncharted terrain for many people. An appointment with your investment professional to reassess your portfolio can be crucial in helping you meet your changing needs. With uncertain variables such as longer life expectancies, the changing rate of inflation, and the possibility that you could outlive your retirement funds, you’ll want to be sure your investments will keep up with you and outpace the cost of living.

Neglecting your investment strategy now could be costly. Inflation is one reason; even at a moderate 3% rate, inflation can substantially cut the purchasing power of your savings over 20 years. Another is that you may find your hard-earned cash dwindling too fast. A balanced portfolio of investments to maximize security while building needed profitability may be crucial to your financial security.

Keep Stocks Working for You 

Many people believe that retirement means investing everything in low-returning money market accounts¹ or certificates of deposit (CDs). While these investments do offer little risk to principal, you should also consider the risks that (1) your assets will not keep pace with inflation and that (2) you may outlive your assets. Although past performance is no guarantee of future results, stocks have historically outpaced inflation by the widest margin and have provided the strongest returns over the long term. So you should consider keeping a portion of your portfolio invested in stocks and stock mutual funds throughout your retirement.²

A Focus on Yield 

Along with some stock investments, a significant portion of your principal will likely be invested in fixed-income investments to provide a consistent stream of income. Depending on your needs, such investments may include high-quality corporate and government bonds, tax-exempt bonds, and high-yield "junk" bonds.³ How much risk (maturity and credit risk) you need to take in these investments depends in part on how much income you need. For example, if you can get by with a 5% annual return, you might be comfortable with high-quality, medium-term, fixed-income investments. But if you need to generate 8% or more on your money, you’ll need a longer-term strategy and will likely have to take on more risk.

You can buy individual government bonds of varying maturities and coupon rates to match your projected cash flow needs. In fact, this is how many insurance companies and banks manage cash flows to minimize interest rate risk. They first estimate a schedule of cash outflows, and then buy securities "maturing" along the same schedule. You can use a similar strategy by buying bonds maturing (principal repaid) in one, two, and three years based on your expected cash needs in those years. You’ll earn the stated rate of interest and likely have little risk of loss of principal, since you shouldn’t need to sell the bonds before the scheduled due date. The rest of your bond portfolio may be invested in higher-yielding, longer-term investments.

Now That You’re Retired, Maximize Your Retirement Income

Security	Risk	Income	Growth Potential
3-Month T-Bill	Low	Low	Lowest
Commercial Paper	Low	Low	Low
Dividend-Paying Stock	Medium	Low	Medium
Intermediate Bond	Medium	Medium	Low
Corporate Bond	Medium	Medium	Low
Convertible Stock	Medium	Medium	Low
High-Yield Bond	High	High	Medium
Growth Stock	High	Low	High
International Stock	High	Low	High

Your Retirement Distribution 

For many people, retirement is also a time to elect a distribution from their company pension and retirement savings plans. Many people may also begin taking distributions from an IRA or annuity at this time.

Because these distributions often involve complex analysis of income and tax scenarios to determine the best choice for your unique circumstances, it’s wise to consult your financial advisor.

If you have substantial assets that generate more income each year than you spend, consider putting some of your investments in a variable annuity. Your investment earnings will grow and compound tax deferred until withdrawal. However, when you withdraw earnings they are taxed as ordinary income regardless of how long they have accrued in your account. Because these tax rates may be higher than capital gains tax rates, you may want to use variable annuities for your fixed-income investments and your most aggressive stock investments — those that typically experience high turnover and therefore generate substantial short-term income distributions (which are taxed as ordinary income rather than as long-term capital gains).

Annuities also allow you to continue making contributions after retirement and to defer withdrawals, often until age 80 or later. Withdrawals from traditional, non-Roth IRAs, however, must begin no later than April following the year you turn 70 ½. After that, you must make your second withdrawal by December 31 of that year and withdrawals by each of the subsequent December 31 dates.

Components of Total Return
While stocks have historically provided income and capital appreciation, the total return of bonds has been composed primarily of interest income. Past performance is not indicative of future results. Sources: Standard & Poor’s; Barclays Capital, 1980-2009. Stocks are represented by Standard & Poor’s Composite Index of 500 Stocks, an unmanaged index of common stocks considered representative of the stock market. Bonds are represented by the Barclays U.S. Aggregate Bond index. Investors cannot invest directly in any index. The performance shown is for illustrative purposes only and is not indicative of the performance of any specific investment. CS000037.

Donate Appreciated Assets to Generate Income 

You can donate highly appreciated assets to charity and generate current income along with a tax deduction, using a charitable remainder trust. With the top capital gains tax rate at 15% for most investors, the value of the tax deduction may be less than in previous years but could still provide an advantage to wealthy individuals.

A charitable remainder trust requires that you donate the asset to a qualified charity or foundation, which will establish a trust. The trustee sells the asset at market value, and then invests the proceeds and pays you annual investment income. You receive a current tax deduction based on the expected remainder value of the asset and your life expectancy. At your death, the trust is paid to the designated charity.

Develop a Strategy for Income and Growth 

An investment portfolio can work hand-in-hand with retirement accounts, annuities, and trusts to meet your income and growth needs. To help determine what kind of investment vehicles may be appropriate for your particular circumstances (as well as how much of your portfolio should be allocated to each asset class), consider your risk tolerance and your needs for income vs. growth. You also want to consider tax consequences of each option. Your financial advisor can help you find a balance that is appropriate for you. Once you’ve established a suitable portfolio, you might consider using your fixed-income and money market investments¹ — and any retirement plan and trust distributions — for your annual expense money. Of course, continuous attention to detail can help keep you ahead of the game — and well cushioned against the rising cost of living.

Points to Remember 

1. Inflation continues to eat away at the value of your savings. Stocks offer the best potential for fighting inflation over the long term.
2. Only a portion of your money is invested for the short term. Today’s longer life expectancies mean a component of your portfolio may be invested for 20 or more years.
3. Income investments include bonds and dividend-paying stocks.
4. You may have to elect payment options for your company pension and retirement plans. You may also elect to begin withdrawals from your IRAs. Consult your financial advisor.
5. An annuity can help you shield investment earnings from taxes.
6. Charitable remainder trusts are vehicles for converting appreciated assets into income.

The term used for the short-term IOUs (generally three to nine months in duration) of large, creditworthy corporations.

The profit earned from the sale of a capital asset, such as real estate or stocks. A capital gain is not "realized" until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on the owner's income tax return for the year in which the asset was sold.

An agreement in which a grantor transfers assets to a trustee for the purpose of benefiting one or more beneficiaries.

The administrator of a trust.

Most often associated with fixed-income investments, this is the risk that a security's price will fall when interest rates rise.

1. A measure of a bond issuer's ability to repay its principal and interest as promised; 2. An individual consumer's creditworthiness, as reported on a credit rating.

A contract between an individual and an insurance company in which the individual pays money into an account in exchange for a guaranteed payment at or during retirement. Annuities offer tax-deferred growth potential. There are two types: fixed and variable.

An investment vehicle representing a loan to a corporation, government, or municipality. Generally, bonds pay a fixed interest rate and return the principal investment at maturity. Bonds issued by the U.S. government are guaranteed as to the timely payment of principal and interest if held to maturity; other bonds are not guaranteed and carry varying degrees of credit risk.

A trust that allows you to leave assets to a charity and receive income and tax benefits at the same time. You can receive income from the trust for a specified period of time, after which all remaining assets are transferred to the charity.

A retirement account to which you may be able to contribute up to a specific maximum amount each year (the maximum amount is determined by Congress). Individuals aged 50 and older may also make additional annual catch-up contributions (up to a specified amount as determined by Congress). Contributions are not tax deductible, but any growth is tax free and qualified withdrawals may be tax free. Certain holding periods and income restrictions apply.

The date by which an issuer promises to repay a bond's face value.

An annuity that allows you to invest your money in accounts offering variable rates of return, such as stock or bond portfolios. As a result, your premium dollars may be exposed to risk generally associated with investing in the markets.

A collection of securities — stocks, for example — owned by a group of shareholders and managed by an investment company. Mutual funds pursue a variety of goals, depending on their investment charter. Some funds work to generate income on a regular basis, while others seek to provide capital appreciation.

A share of ownership in a publicly held company. Owners of stock receive voting rights on issues affecting the company and may receive dividends.

A measure of a fund's performance that encompasses all elements of return: dividends, capital gains distributions, and changes in net asset value. Total return is the change in the value of an investment over a given period, assuming any reinvestment of dividends or capital gains distributions, expressed as a percentage of the initial investment.