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Prepare Your Portfolio

Written by Carrie T. Ratzlaff    Tuesday, 20 December 2011

HOW TO INVEST BEFORE AND DURING RETIREMENT TO GENERATE INCOME AND GROWTH Many preretirees leave their investment asset mix alone until the day they retire and then consider making changes. That proved to be a disastrous strategy for those who planned to retire in 2008 and 2009, as they watched the stock market plunge more than 50% (and much of their savings along with it). Here are some guidelines for how to rejigger your investments five years before you retire to protect your income for the first five years in retirement-and how to position the balance of your portfolio for growth for the next 25 years. FIVE YEARS BEFORE RETIREMENT PROTECT A PORTION OF YOUR INCOME STEP 1: ADD UP YOUR CURRENT SAVINGS List the value of all of your retirement accounts STEP 2: SEE HOW MUCH IT WILL GROW BY RETIREMENT Multiply by 1.28 (Assumes 5% annual growth) STEP 3: LIST MONTHLY CONTRIBUTIONS Include your contributions and any employer match STEP 4: ESTIMATE FUTURE VALUE OF CONTRIBUTIONS Multiply by 68 (Assumes 5% annual growth) STEP 5: PROJECT YOUR TOTAL SAVINGS AT RETIREMENT Add the amounts in steps 2 & 4 STEP 6: DETERMINE THE AMOUNT TO PROTECT NOW Multiply the amount in step 5 by 0.22 This is how much you should transfer now to create income for your first five years of retirement. You can use a five-year CD, stable value fund, or five-year fixed annuity. *To estimate how much annual income your projected savings would generate, multiply by 0.05. If that's not enough to supplement your Social Security benefits, see the accompanying article for ways to rescue your retirement. WHEN YOU RETIRE INVEST TO GENERATE INCOME AND GROWTH PURCHASE A FIVE-YEAR IMMEDIATE FIXED ANNUITY. Use the money you transferred to a fixed account in step 6 at left. This will create an income stream for your first five years of retirement to supplement Social Security and any other retirement income. TRANSFER 26% OF YOUR RETIREMENT FUND BALANCE TO A FIVE-YEAR FIXED ACCOUNT, such as a CD, bond or five-year fixed annuity. Aim for a 4% rate of return, without taking any market risk. KEEP REMAINING FUNDS INVESTED in the 50/40/10 asset mix listed at left, aiming for a 6% return. REPEAT THESE THREE STEPS EVERY FIVE YEARS. That will ensure a steady stream of retirement income while always keeping a portion of your money invested for growth. DIVERSIFY THE BALANCE Put the balance of your retirement savings (78%) and your future retirement contributions in the diversified mix shown here. Use index funds or exchange-traded funds, if possible, to keep expenses low. Rebalance your portfolio once a year to maintain the same mix. ALTERNATIVE INVESTMENTS 10% Including commodities and domestic and International real estate funds. 50% STOCKS Including U.S., foreign and emerging markets. BONDS 40% Including high-quality corporate and government bonds of five years or less.

Last Updated ( Tuesday, 20 December 2011 )