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Managing Retirement Income

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In the beginning years of retirement, a downturn in the stock market can cause irreparable damage. While others can withstand short term market volatility, retired individuals that must draw income are vulnerable to selling shares when market prices are down. This can be especially difficult because they may not have any time in the future to recover from the loss. To prevent this sort of catastrophe, a retirement income plan should be reviewed continuously and action taken to assure the income stream.

Assets should be dispersed across funds that respond differently to economic conditions. This will decrease the influence of any one particular investment which may under perform the market, or which is sensitive to particular market forces. A proper combination of investments will probably include stocks, bonds and cash. Real estate and commodities should also be considered. The goal is to participate in long term growth, which means some of the assets must be at risk. However, the medium and short term time horizons should also be considered, and bonds and cash are appropriate asset classes to consider.

An asset allocation is not something that is set once and then forgotten about. Because of the various growth rates that will occur in different asset classes, the mixture will not always be in proportion to your original wishes. Therefore, the mix should be reviewed regularly.

Early in retirement, a poor market may cause asset erosion. This can happen if income that you though could be taken from earnings must be withdrawn from principle due to low or negative earnings. Therefore, as you get closer to retirement, and during the income years, you may want to slowly reallocate your assets toward bonds, because of their capability to deliver income without as much volatility.

As well, you ought to be especially diligent when determining your withdrawal amounts. You are limited by the amount you have set aside and your estimated life span, as well as investment performance. Observing past market performance, experts advocate extracting no more than 5% of a portfolio’s worth every year. This strategy may assist in maintaining a cushion against possible future market losses while supporting a hypothetical pay out schedule of 20 years or even more.

To find out more about how stock market volatility can affect your retirement plan visit the links.

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