Having a Proper Income Distribution Plan

Inflation - A key risk in retirement is inflation; the inevitable increase in the cost of goods and services, including housing, clothing, food, electronic devices and health care. Even with very low rates of inflation, say 3 percent a year, you would lose half of your purchasing power over two decades. This can create the biggest risk to investors’ long-term ability to make ends meet.

To guard against inflation, you can invest in inflation-protected securities or other investments that will gain value as overall prices climb. For instance, stocks in your portfolio aimed at growth rather than income will provide a hedge against inflation.

The Market – When you hear the word risk, the danger that usually springs to mind is market risk. That’s the scenario in which you’ve amassed a healthy portfolio of stocks and bonds only to see it plummet in value because of a market crash or other disruption to the global financial system.

The solution: Diversify your portfolio among a healthy mix of stocks, bonds, commodities and real estate, with no outsized holdings in one company’s stock. On the stock side, a portfolio would be allocated among several asset classes, geographic regions and companies of various sizes. It should reflect a combination of value, growth and dividend-paying investments. On the fixed-income side, it would be invested mostly in government and investment-grade corporate bonds with varying terms and durations.

Sequence of Returns – When you regularly invest in a retirement plan during your career – a practice called dollar-cost averaging – you purchase fewer shares when the market is up and more shares when the market is down. You’re effectively buying low and curbing your purchases when prices are high.

Unfortunately, when you withdraw money from your portfolio during retirement, the volatility of markets can inflict substantial damage. If you take a set amount in distributions each month, you end up selling more shares when the market is low-locking in you losses rather than giving the market a chance to recover.

To protect against this risk, it is recommended setting aside two years’ worth of living expenses as a buffer. When the market is down, you can draw down from that cash rather than selling from your portfolio. When it’s up, you can sell your investments at a profit.

You can also purchase annuities and other guaranteed-return investments to cover your bare-bones living expenses.

Now the sequence of returns is only happening to your excess funds, and you can pick and choose when you want to pull those excess funds.

Fraud – You’re in control of your faculties and capable of making investments now. But what might happen in the next 20 years? There’s the risk of cognitive decline, which would make it harder for you to make sound financial decisions. Similarly, there’s a risk you may fall prey to a swindler, which could happen regardless of your mental state.

To combat this, educate yourself now. Make sure you understand how the financial professionals in your life are paid and what incentives they might have to sell you products or ensure good results. Line up your trusted advisers now, while you’re most able. You want to know how the incentives work, for you or against you.

Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved. Systematic investment plans, such as Dollar-cost averaging, do not assure a profit or protect against loss in declining markets. Such plans involve continuous investment, regardless of market conditions. Markets will fluctuate, and clients must consider their ability to continue investing during periods of low price levels

Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors. Talk to your financial advisor before making any investing decisions.

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