We look at a method for determining how much a retiree should invest in stocks versus bonds if they receive guaranteed incomes such as pensions, annuities, Social Security, trust income, or others.
The information is based on a paper published in the Journal of Financial Planning. The link to the paper is here:
The formula is:
1.) add up all your annual guaranteed incomes
2.) look up your multiplier in table 1
3.) multiply answer from step 1 times step 2
4.) add answer from step 3 plus total value of your investment accounts
5.) divide step 3 by step 4. This is your percentage in guaranteed income.
6.) use table 3 to find your recommended stock percentage.
“One million dollars” clip is from the movie Austin Powers: International Man of Mystery. …(read more)
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Investing while receiving a pension, annuity, or any other type of guaranteed income can be an excellent way to maximize your financial resources and secure a comfortable future. With careful planning and strategic decisions, you can make your money work harder for you, allowing it to grow over time. Here are some tips on how to invest if you receive a pension, annuity, or other guaranteed income.
1. Create a budget: Before you start investing, it’s essential to establish a clear understanding of your current financial situation. Analyze your income and expenses to determine how much money you can allocate towards investing. This will help you set realistic investment goals and avoid any unnecessary financial stress.
2. Assess your risk tolerance: Consider how comfortable you are with taking risks when it comes to investing. Usually, pensioners prefer more conservative investments to preserve their income and minimize the chance of losing principal. However, it’s important to find a balance between risk and reward that aligns with your financial goals.
3. Diversify your portfolio: Diversification is key to managing risk and achieving stable returns. Invest in a mix of asset classes such as stocks, bonds, mutual funds, and real estate to spread out your investments across different sectors and mitigate exposure to any single financial market. By doing so, you can potentially enhance your returns while reducing overall risk.
4. Consider income-producing investments: Given that you already receive a guaranteed income, focus on investments that generate additional income. Dividend-paying stocks, government and corporate bonds, or real estate investment trusts (REITs) can be good options to consider. Such investments can provide a steady flow of income without significantly depleting your overall investment capital.
5. Seek professional advice: Consulting with a financial advisor who specializes in retirement planning can be immensely helpful when investing your pension or annuity. They can analyze your unique financial situation, provide investment recommendations, and ensure your investment strategy aligns with your long-term goals.
6. Review your investment portfolio regularly: Regularly review your investment portfolio to ensure it remains aligned with your financial goals and overall market conditions. As your circumstances change over time, you may need to adjust your investments accordingly. Stay informed about market trends and seek professional advice whenever required.
7. Emergency fund and insurance: While investing for the future, it’s crucial not to overlook the present. Maintain an emergency fund that covers at least three to six months of living expenses. Additionally, assess whether you have adequate health insurance, life insurance, and long-term care insurance to protect yourself and your loved ones from unexpected events.
8. Stay informed and educated: Continue learning about investment strategies, financial markets, and new opportunities that may arise. Education is a powerful tool to make informed investment decisions and actively manage your assets. Stay updated on industry news, follow reputable financial resources, and attend investment seminars/webinars to enhance your knowledge.
Remember, investing is a long-term game, and patience is key. It’s important to set realistic expectations and be prepared for market fluctuations. By maintaining a disciplined approach, diversifying your portfolio, and seeking professional advice when needed, you can make the most of your pension, annuity, or other guaranteed income and build a secure financial future.
What if I have a pension that has already started, an income stream that plays out in a couple years, SS that starts in a couple years, (say wife) and SS that starts in about a decade, (then me)? I'm going to want to have a consistent spending budget. What I'll do is set up a bucket system. Money outside the Guaranteed income stream (GI) that I'll need within two years I'll invest in cash, money market, etc. Money outside GI that I need in 2 to 7 years, I'll invest in conservative stuff like bonds, preferred shares, etc. And finally, Money outside GI that I need in 8+ years, will be invested in total market type funds or compilation of funds that best mimics the total market.
Thanks, you give good insight to retirement!
Way to over simplified. a pension and $1,000,000 na d still 95% ?!?!?!?!
Not sure
I’m in a similar situation. All I need is the $1M lol
if you have$98,000/year guaranteed at age 65, why on earth would you need to be invested in the market at 95%? A 4% withdrawal rate is another $40,000/year for a total of $138,000. How much do these people need to live per year?
yes link to spreadsheet please
Can you add a link to your spreadsheet?
So the higher the % of fixed income to total wealth, the more aggressive the investment strategy can be?
So my question is, I’m 59 as is my spouse, we almost mirror your example. How should I allocate my retirement accounts. About 1 million in taxable accounts and just over 100k yearly pension with a 125% survivor benefit. I’m not taking anything from my retirement accounts and maybe never will need to, especially when SS benefits are available. We’ll probably take my spouse’s SS at 62 as she was the lower earner and wait for mine at FRA or 70.