6-step plan helps your nest egg thrive — even if the market dives

You spend much of your life building up a nest egg to last through retirement. And you have to figure out how much you can spend each year without draining it too quickly.

Then just when you think that you have a good plan, the stock and bond markets go on a roller-coaster ride that throws you off track, as they have in recent years. There must be a better way.

Philip G. Lubinski, CFP, has a better way, and he has been proving that it is effective for nearly three decades. We asked him to explain how his plan works and why it’s especially valuable today…

THE SIX SEGMENTS

The traditional investment strategy that most people follow is to divide your retirement savings between stocks and bonds. In the first year of retirement, you withdraw a predetermined percentage of the total amount, typically 4%, to pay your living expenses. Each year after that, you increase your withdrawal rate slightly to adjust for inflation.

But the market crash of 2008 forced many people to alter their savings and spending plans drastically to avoid running out of money.

Better way: Divide retirement savings into six distinct segments, a strategy that I call the “income for life” retirement-planning model.

Each of the first five of these segments finances a specific five-year period of your retirement. The sixth segment provides additional funds in case you (and/or your partner) live longer than 25 years in retirement. If not, this sixth segment serves as an inheritance for your heirs.

This strategy has been proven in a study to allow retirees to maintain their initial principal and weather bad markets even if their initial withdrawal rate is as high as 5.66% rather than the traditional 4%. Here’s a closer look…

Segment 1
Pays for the First Five Years

Allocation: 28% of your initial retirement nest egg.

Investment strategy: Invest Segment 1 assets initially in a type of guaranteed annuity that reaches maturity when you retire and typically pays higher rates than certificates of deposit (CDs). The best time to buy it is around five years prior to retirement.

At the start of your retirement, this annuity can be exchanged for a five-year immediate-income annuity, which provides a monthly check for five years… or the proceeds can be invested in “laddered” CDs that mature over the first five years of retirement. If you buy an annuity, make sure it is from a company rated A or better by A.M. Best (www.AMBest.com).

These guaranteed investments ensure that market fluctuations have no effect on the early years of your retirement.

Investment goal: 2% annual return.

Result: Over the five years in this segment, you can withdraw $490 a month for each $100,000 in your overall retirement porfolio.

When to invest for Segments 2 through 6: You make these investments at the beginning of your retirement. Then when you enter each segment, you transition from the suggested strategy to a mix of ultrasafe investments, such as immediate-income annuities and/or laddered CDs.

Segment 2
Pays for Years Six Through 10

Allocation: 26% of your initial retirement nest egg.

Investment strategy: Invest this money either in a laddered portfolio of investment-grade bonds that mature in five years or less… in five-year CDs… or in a deferred fixed-annuity contract that will not provide income until you enter year six of your retirement.

Investment goal: 4% annual return from the date that the income-for-life model is established until the dawn of Segment 2, five years into retirement.

Result: You can withdraw $554 a month per $100,000 in your portfolio.

Segment 3
Pays for Years 11 Through 15

Allocation: 20% of your initial retirement nest egg.

Investment strategy: Invest 40% of these assets in a diversified portfolio of stocks and “alternative” asset classes through either low-expense index mutual funds or, preferably, exchange-traded funds (ETFs). Include funds that track US large-, mid- and small-cap stocks… foreign stocks… emerging markets… commodities… and real estate investment trusts (REITs). The same fund categories apply to Segments 4 though 6 but with a greater tilt toward small-cap value and emerging-market stocks.

The remaining 60% of these assets should be invested (and reinvested upon maturity) in bonds maturing in five years or less, which also are the types of bonds to use for Segments 4 and 5. (There is not enough extra reward in long-term bonds to justify their risks.) A 50/50 stock/bond allocation is acceptable if you have a high risk tolerance and need to be aggressive to reach your desired retirement income.

Investment goal: 6% annual return from the date that the model is established until the dawn of Segment 3, 10 years into retirement.

Result: You can withdraw $627 a month per $100,000.

Segment 4
Pays for Years 16 Through 20

Allocation: 13% of the nest egg.

Investment strategy: Much like the Segment 3 strategy, but this time put 60% in stocks and 40% in bonds.

Investment goal: 8% annual return.

Result: You can withdraw $722 a month per $100,000.

Segment 5
Pays for Years 21 Through 25

Allocation: 7% of the nest egg.

Investment strategy: Similar to Segments 3 and 4, but 80% is invested in stocks and 20% in bonds.

Investment goal: 10% annual return.

Result: You can withdraw $824 a month per $100,000.

Segment 6
Pays for Remaining Years

Allocation: 6% of your initial retirement nest egg. This amount can be increased if allocating the prescribed amounts to Segments 1 and 2 would result in more income than required early in retirement.

Investment strategy: At the start of retirement, invest Segment 6 assets entirely in the non-bond fund categories used for Segment 3. This money isn’t touched for at least 25 years, long enough that even the most volatile investment classes are not that risky.

Investment goal: 12% annual return, not counting any money used to purchase longevity insurance, which typically provides guaranteed annual income starting at age 85.

Result: If your Segment 6 investments earn a 12% annualized return, you should have just as much money in this segment after 25 years as you had in your entire retirement portfolio when your retirement began.

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