Maximize Your Golden Years: 3 Retirement Income Approaches—Which One Is Right for You?

 Hosted by George Jameson, CFP® and founder of Capital Wealth Group in Columbia, SC, this episode explores three key retirement income strategies to help you make the most of your golden years. Discover the pros and cons of each approach and determine which one aligns best with your financial goals. 

 Welcome to "The Retirement Guide" Podcast! I'm your host George Jameson, owner of Capital Wealth Group, a Fee Only Advisory firm. Whether you’re nearing retirement or already retired, Join me each week as we explore the world of retirement planning and equip you with the knowledge and tools you need for a successful retirement.

Thank you for tuning in to this episode of The Retirement Guide. If you enjoyed this episode, please subscribe & leave a review. If you'd like a free 30-minute retirement review, visit our website at www.capitalwealthplan.com to schedule.

This is for education only.It is not tax, legal, or investment advice. Before  acting on any information consult your tax, legal, or investment advisor.

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Transcript

So let’s get started. Today, we're diving deep into a topic that's crucial for anyone looking to secure their financial future: retirement investment strategies. Specifically, we're going to explore three different retirement income investment approaches. A quick note: a couple of these strategies came from Dr. Wade Pfau, the leading researcher in retirement income planning, but it does not cover all of his strategies. You can listen to my 4th episode 4 retirement income strategies to learn about all 4 of Pfau’s strategies. 

Now, you might be wondering, "Why should I care about different investing strategies?" Well, the way you invest can make or break your retirement dreams. It's not just about saving money; it's about making that money work for you throughout your golden years.

Let’s start with the first approach: the Total Return Approach. This is the more traditional strategy that most people think of for retirement. It’s sometimes called a “probability-based” approach because it relies heavily on the ups and downs of the stock market. The strategy focuses on keeping a mix of diversified investments, mostly stocks and bonds, and drawing income from the overall returns—things like capital gains, dividends, and interest.

This approach is ideal for those who are comfortable with market risk and want to stay flexible with their investment choices. The goal here is to grow your portfolio as much as possible while managing withdrawals to fund your retirement needs.

Here's why it's popular: it gives you the potential for higher returns and helps you keep pace with inflation. Plus, you maintain liquidity and control over your assets. Sounds great, right?

But hold on, there's a catch. This approach exposes you to what we call "sequence of returns risk." That's a fancy way of saying that if the market takes a nosedive a few years before retirement or a few year after retirement, it could seriously impact your long-term financial health.

To make this strategy work, you need to be comfortable with ongoing portfolio management and rebalancing. You might also need to adjust your withdrawals based on market performance. It's not a "set it and forget it" kind of deal.

Now, let's move on to the second approach: the Safety First Approach. This strategy is all about peace of mind. The core idea is to cover your essential expenses with guaranteed income sources. We're talking about annuities here but, before you tune out, I want to clarify that I do not sell annuities for commissions and I am not promoting them. 

Yes, you would include your Social Security and a pension if you will be getting one, but for most people, your essential expenses will be more than what you get from guaranteed sources. That’s why Dr. Pfau recommends using an Annuity for those that prefer the Safey First Approach. 

Specifically, He recommends, a (Single Premium Immediate Annuity) or DIA (Deferred Income Annuity) that offers guaranteed income for life, or if married, for both spouses' lives. These can be great options, but it’s important to note that most people I meet with are hesitant to give a large chunk of money to an insurance company without the possibility of getting any of it back. 

Alternatives to consider are Index Annuities and Fixed Annuities with income riders. These products can provide some of the same guaranteed income benefits and if you end up not annuitizing them you can get some or all of your investments back after the surrender period is up.

Think of the Safety First approach as creating a solid floor for your retirement income. Once you've got your basics covered, you can invest any remaining assets using a diversified portfolio for those discretionary expenses - you know, the fun stuff!

The big pro here is the security. You know your essential needs are covered, no matter what the market does. It's a great way to reduce stress and ensure you can always keep the lights on and food on the table.

But there are downsides. This approach might limit your upside potential and flexibility. And if you're using annuities, be aware that they can be complex and sometimes come with high fees. It's crucial to understand what you're getting into.

To sum up the Safety First Approach: you would purchase an annuity that guarantees lifetime income—covering either your lifetime or both if you’re married—to handle your essential expenses. The rest of your assets would be invested in a diversified portfolio of stocks and bonds. Since your daily living expenses are covered by the annuity, you could take a more aggressive investment strategy with this portfolio. You could use it for vacations or other extra spending. But if the market takes a hit, you’re not forced to withdraw—you can adjust, maybe opting for a more budget-friendly vacation like a beach trip instead of a European tour, depending on your situation.

Alright, on to our third approach: the Total Return Approach with Cash Buffer. It combines elements of the total return approach with a cash reserve to provide stability during market downturns. 

Here's how it works: you maintain a diversified portfolio for long-term growth, but you also set aside 2-4 years of expenses in cash or cash equivalents. This cash buffer is your secret weapon against market volatility.

When the market's doing well, you draw from your investments. But if things go south, you can dip into your cash reserve. This gives your portfolio time to recover without forcing you to sell assets at a loss.

The beauty of this approach is that it provides a psychological cushion. When the market's going crazy, you can sleep easy knowing you've got a few years of expenses tucked away safely. It also helps reduce that sequence of returns risk we talked about earlier, especially in the early years of retirement when your portfolio is most vulnerable.

But remember, there's no free lunch in investing. Holding a significant amount in cash means that money isn't growing as much as it could be during bull markets. You'll need the discipline to replenish your cash buffer when times are good.

Before I wrap it up, you will notice that I did not mention using a bond ladder as part of a strategy or dividend stocks. There can be a place for both as part of an overall approach but not on their own. A bond ladder could make sense for conservative investors and dividend stocks can be part of the total return strategy but I would not use either as a separate strategy. 

So, which approach is best? Well, that's the million-dollar question, and the answer is... it depends! Your ideal strategy depends on factors like your risk tolerance, risk capacity, desired lifestyle, legacy goals, and overall financial situation.

The key takeaway here is that retirement investing isn't one-size-fits-all. Dr. Pfau's work highlights the importance of considering multiple risks in retirement - longevity risk, inflation risk, market risk - and developing a strategy that addresses your specific situation.

As you plan for retirement, think about which of these approaches resonates with you. Are you comfortable with market fluctuations if it means potentially higher returns? Or would you sleep better knowing your basic expenses are guaranteed? Maybe a balanced approach with a cash cushion feels right?

Remember, retirement planning is a journey, not a destination. Your strategy may evolve as you get closer to retirement and even during retirement itself. The important thing is to start thinking about these approaches now, so you can make informed decisions about your financial future.

And hey, if all of this feels overwhelming, don't hesitate to seek professional advice. A good fee-only financial advisor can help you navigate these strategies and create a plan tailored to your unique needs and goals.

That's all for today, folks. I hope this deep dive into retirement investing strategies has given you some food for thought. Until next time, happy planning!

Thank you for tuning in to this episode of The Retirement Guide. If you enjoyed this episode, please subscribe and leave a 5 star review to help others discover the show.

For questions, ideas, or to discuss your retirement plan, reach out to me, George Jameson, at Capital Wealth Group. Visit our website, at capitalwealthplan.com to learn more.

Thank you for listening and stay tuned for more insightful retirement planning in future episodes.

Disclaimer

The information discussed in this podcast is for general explanations and education only. It is not tax, legal, or investment advice. Before considering acting on any information heard here, first consult with your tax, legal, or investment advisor. Thank you and have a great day. 

 Learn more about Capital Wealth Groupand George Jameson, CFP®, MBA, a Financial Advisor based in Columbia, SC, CLICK HERE!

 George can be reached at (803) 250-6464 orgeorge@capitalwealthplan.com

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