Income Distribution

Income Distribution
by Takara Alexis

In terms of your finances, your pre-retirement earning years focus on accumulation and growth of your money. You earn money from your job or business to pay for your current living expenses. You set some away in case of emergencies and for any needs in the future like college and retirement. Your goal is to gather as much as possible by earning it and investing it.

After retirement, you typically no longer contain money earned from work or business to pay for your living expenses. You require safety and liquidity to ensure available funds for day-to-day costs of living along with growth to help ensure your funds last your lifetime. The growth-oriented portfolio structure of your earning years may no longer apply, and you may need to change the way you evaluate your portfolio' s performance.

In fact, in an effort to assist with reducing risk and protect principal, a lot of retirees alter their asset mix to a more conservative, income-based allocation. The outcome is a portfolio made to provide higher rates of current income and less volatility. In other words, your need to preserve what you have now typically outweighs your need to grow your money at a benchmark rate, although you still need enough growth to ensure inflation doesn't minimize your buying power during retirement.

Depending on your age, your investment tendencies might lean too much toward growth or too far toward conservative income. If you are at the leading edge of the Boomer generation, you could have experienced years of significantly high market returns, changing your expectations for your own portfolio toward the high end.

If you're in the senior or "veteran" age group, however, you may harbor some distrust of stocks and over- confidence in bonds. Investors in this group also tend to underestimate their life expectancy, based on how long their parents lived. By overweighting your portfolio in the relative safety of fixed income and income investments, you increase the potential of outliving your money.

A retirement distribution plan looks to find that middle ground between reduced risk and greater return, taking into regard all income streams (i.e., Social Security, wages, pensions, investment income, annuity income), assets, inflation risk, investment risk and tax exposure. Plenty of variables can come into play, so each factor needs to be evaluated based on the individual situation.

Generally, a retirement distribution model will allocate a larger portion of assets to fixed income and income segments, followed by growth and income, growth, aggressive growth and most aggressive segments in progressively lesser percentages. The intended result is an inflation-adjusted income that lasts your lifetime by minimizing emotional investment decisions, keeping purchasing power, minimizing risk, preserving principal and maintaining an appropriate amount of long-term asset growth.

Organizing a retirement distribution plan can be complex and requires a thorough understanding of investment products and strategies and their associated risks. Your financial professional will help you determine the asset allocation model and products that best meet your needs.