• Retirement and Annuity Advisor Jennifer Lang

When It's Time to Move Your Portfolio from Growth to Income

Updated: Sep 30, 2020

Earlier in your career, you focused on saving and growing your money so you could pursue your financial goals later in life. You might have worked with a financial advisor to do this.


Over the years, you socked away money in a retirement account and maybe even grew an overall portfolio. That meant having and following a strategy with a focus on accumulation and asset allocation. But as we reach the so-called retirement red zone -- that crucial period of a decade before and into retirement -- new planning is essential.


The income you earned from your career likely won't be the same once you retire. Then there is the challenge of making your money work for you.


How do you ensure that the income you draw from your portfolio is as efficient and tax-wise as possible? You want to be sure that your money lasts as long as you need it to in retirement!


The New Challenge in Retirement


One big challenge is transitioning from this concentration on accumulation and portfolio allocation to lifetime income and distribution planning in retirement. If unplanned, your income may be smaller year after year due to a heavy tax burden eating into it.

Your portfolio will have a bad year at some point, and the timing of your withdrawals might impact just how much income you have for years ahead. It's not only that which you have to be mindful of, too.


If you have a shortfall between the income you earned in your career years and what you expect for income in retirement, that can impact your ability to pursue your goals down the road.


All of this and more is why it's so important to make the switch from accumulation to protection and lifetime income planning focuses while you are in the retirement red zone. Here are five steps to take in order to help you make the transition.

1. Envision Your Expected Retirement Lifestyle and Calculate Its Costs


Begin with the costs you already have. What will monthly living expenses be like?

What do you expect your housing situation to be? Will any of your expenses that you are paying now be gone, such as a mortgage?


It's vitally important to be realistic when you assess this. If you miss the mark on how much you will get, you may run out of money in your later years.


If you retire before you are eligible for Medicare, will your healthcare spending rise from what you are paying now? Will you spend more or less on housing, utilities, food? What about usual expenses like clothes, transportation, entertainment, and travel?


Those last two items listed -- entertainment and travel -- can substantially eat into your savings if you aren't careful. It may be tempting to go on a world tour, but you had better be sure you can really afford something like that.


Run the numbers for these now, and get your projections down on paper. Prudent planning will estimate these numbers for a 30-year timeline or greater.


Don't forget about inflation each year, and taxes will also be an expense. Be sure to include federal and state income taxes, property taxes, capital gains taxes, and other tax costs that you can determine with your tax advisor's help.


2. Revisit Your Tolerance for Risk


As we age, it's common for our appetite for risk to go down. In retirement planning, a major risk that comes to mind for many people is market risk.


Prudent planning calls for revisiting your risk tolerance, or how much loss you can handle emotionally. Not only that, consider your risk capacity, or just how much loss your portfolio can handle mathematically before your retirement strategy is thrown into havoc.


Your financial professional can help you determine this and revisit your existing financial strategy to see if any adjustments might be helpful.


3. Optimize Your Social Security Benefits


You can face up to a 30% permanent slash on benefits if claimed before your full retirement age (FRA). Delaying your benefits-claim past FRA allows your benefits to accrue roughly 8% per year.


Waiting doesn't make sense for everyone. The right time for you will depend on your financial situation.


But those who continue working until they reach the maximum retirement age would probably be wise to delay their benefits until they finally retire. Those who wait until the maximum retirement age to start taking benefits can see an increase of 32% in their monthly benefit checks.


4. Determine Your Sources of Income


Your income will change after you retire. How will you replace the take-home pay from your career? Once you have an idea of what you will receive from Social Security, you can start filling in your remaining income needs with your savings and your portfolio.


Have a pension? Consider other sources of guaranteed income for living expenses.

That way you don't ever have to worry about meeting the cost of your lifestyle on a monthly basis. Annuities can offer "more bang for your buck" for reliable cash-flow than other guaranteed instruments can.


How? Because of how the insurance company manages these contracts and stands behind them.


There are three types of annuities: fixed, indexed, and variable. Fixed annuities pay a guaranteed rate of interest for a set period of time.


Meanwhile, indexed annuities pay a non-guaranteed interest rate, which is tied to an underlying index benchmark, while guaranteeing your principal. Variable annuities will rise and fall in value in tandem with the markets where you have your annuity dollars.