Live Within Your Means
Once you retire, your income will most likely come from four sources: Social Security, company-sponsored retirement plans, IRAs and taxable invested assets. The right asset allocation will consider your risk tolerance, your time horizon and your current assets. You and your advisor should discuss these options now, so that your portfolio is appropriately allocated at retirement. Consider these three ways you can draw from your assets:
1. Preserve what you have by living on investment income only.
- Pro: You'll preserve your principal and you won't tap into contributions.
- Cons: Income amounts may vary due to market fluctuations and if you're invested heavily in fixed income, your investments may not keep pace with inflation. Also, you'll have to keep more of your assets in the stock market, which may be riskier, in an attempt to produce a higher income.
2. Live on capital, as well as capital gains, interest and dividends.
- Pro: You have more income to spend.
- Con: Income amounts will vary due to market fluctuations.
3. Estimate your life expectancy, then take a look at your portfolio's historical and potential future returns and make equal withdrawals over time.
- Pro: You'll have more income to spend.
- Con: If your estimate is wrong, you'll run out of money.
Because of the risks associated with each option, it's important to sit down with your financial advisor. He or she understands your personal situation and can help you make good decisions about your retirement.
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