Income & Retirement Planning to Combat the ‘Stealth Tax’

Seeking the right advice for retirement planning throughout one’s working years is key to building a balanced portfolio. In fact, those savings years is referred to as the “accumulation phase,” in an overview on retirement into Forbes magazine.

But even the best planning, savings and advice may not protect the retirement portfolio from ‘inflation,’ which is often referred to as the stealth tax.

It’s often the case that investors nearing the retirement threshold arrive with too little money to support their expected lifestyle.

No surprise, but such investors may not have the time horizons that younger investors enjoy to see their assets grow. Worse, they may take unnecessary financial risks in hopes of ‘catching up.’

Total returns and growing assets.

Savvy investors working with an experienced financial professional can receive the help they need to structure the portfolio to achieve the highest asset growth and total returns. Ultimately, such strategies reflect a portfolio designed with the risk tolerance of the investor in mind, thereby protecting investments when markets decline.

Unfortunately, the added risk of living longer means, even more, pressure on these growing assets: the idea of outliving our investments heightens that need to make invest smartly to keep ahead of inflation.

How much income will we need in retirement?

What is a reasonable percentage of pre-retirement income that we’ll need in retirement? In some cases, financial gurus advise that we should be replacing 75 to 85 percent of what we are earning now leading up to retirement.

However, according to the Financial Planning Association, as noted in a Wall Street Journal article, such percentages are really on the low end of the spectrum. This is mainly due to the ever-increasing costs in healthcare.

To combat these rising costs, and to protect the portfolio from diminishing purchasing power, the report notes that investors should look at “replacing 92% of their preretirement income (WSJ, from A Guide to Financial Planning: “The Long Haul.”)

Protecting the portfolio’s purchasing power

Protecting purchasing power is one consideration, but an equally important concern, according to the WSJ, is how best to reduce taxes.

For sure, we can never be immune to the continued rise in consumer prices, health-care costs and other retirement expenses. In fact, in a 3% annual inflation environment, the cost-of-living would be on track to double over 23 years.

Stocks: A defensive strategy to fight inflation.

It’s long been touted that the ideal portfolio should include stocks and stock mutual funds. More importantly, this approached must be a long-term strategy as a good defense against inflation.

In fact, investing in large, stable companies with a solid history of paying out dividends is another way to bulletproof the portfolio: dividend-paying stocks and stock mutual funds can be an added defense to meeting or beating inflations.

As noted in a Forbes overview on investing, “the miracle of compounding” (especially over time) can provide retirees a “steady flow of additional cash”—for reinvesting or spending!

Annuities to round-out the portfolio

Of course, bonds do have a place in the retiree’s investment to provide that underpinning of security to their income—as do annuities.

In the latter instance, a contract with an insurance company can provide a steady stream of payments to the “individual at a later point in time.” These products are usually offered as fixed or variable.

Ultimately, these products are designed to provide “stable, guaranteed retirement income, thereby offering a strong hedge against “longevity risk.”

Investors can also purchase an immediate annuity, whereby they “exchange” a lump sum “for cash flows into the future.” Such examples are a common option for people who may have come into a lot of money (lottery winners) and are looking for a future, guaranteed income stream

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