Fine-Tuning Your Investment Strategy

Generating Monthly Income

In retirement, most of your expenses occur on a monthly basis. Thus, most retirees prefer their income on a monthly basis. Income includes interest and dividends, and in some cases return of principal. Investment vehicles that provide monthly income include mutual funds, government mortgage-backed securities, and fixed annuities. Other income-producing investments, although not monthly, include certificates of deposit*, Treasury notes, and Treasury bonds.

The income from these investments helps cover day-to-day expenses. Since the payments are typically made regularly, investors plan on them, but need to be aware that there is no assurance or guarantee that income will be generated or maintained. However, you also need growth in your portfolio to combat inflation. As investments with growth potential increase in value, you can make withdrawals without decreasing your original principal. The key is to have a well-rounded portfolio of both income-producing investments and investments that can outperform inflation. Diversification is another key element in managing your portfolio.

SUGGESTION: You can time certain investments by using a strategy called laddering. Using fixed-income investments with fixed maturity dates, such as Treasuries, certificates of deposit,* or bonds, you divide your investable dollars into equal amounts (say five). Then put one-fifth into instruments maturing in each of five years. If interest rates go up when the first maturity date comes, you reinvest at the higher rate. If rates have declined, only one-fifth of your portfolio has to be reinvested at this lower rate, while the rest continue to grow at the higher rates. Spreading maturities in this manner should increase your yield over time, and produces a steady flow of income.

IMPORTANT NOTE: Annuities are long-term investments. If you begin distributions before age 59½, you may be subject to a 10% penalty on the portion of the withdrawal that represents accumulated earnings. In addition, the earnings are subject to ordinary income tax. Finally, the annuity may impose surrender charges on withdrawals that exceed a certain amount (usually 10%) during the early years of the contract.

* CDs are FDIC-insured up to $250,000 and offer a fixed rate of return if held to maturity.

The Effects of Inflation

Currently, we are enjoying a relatively moderate annual inflation rate. However, over time, inflation adds up. For example, assuming an inflation rate of 3%, in January of 1998 an item that cost $10 in 1968 would have cost $24. In January of 2015, that same item would have cost $40.

What's the bottom line? In order to keep up with inflation, your investments (overall) must earn at least the inflation rate. In order to get ahead, you need to earn more than the inflation rate.

SUGGESTION: Preserving purchasing power should be one of your main investment objectives.

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