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Michael Aloi

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Low interest rates are a big challenge for retirees today. To help cope, try these three strategies.

A long time ago in a galaxy far, far away, retirees could live off the interest from their CDs and bonds. A lot has changed since then. With interest rates now at historical lows, retirees are feeling the pinch.

This doesn’t mean retirement is out of reach. Only we need to plan a little smarter and harder.

Here are three examples of how to boost retirement income.

1. Start with reducing your expenses.

My clients make a list of all expenses. Line by line, each expense is then scrutinized. I ask them, is there a way to reduce the expense? Can you live without it or on a smaller scale? Cable bills, cellphone bills, subscription services, all of these add up.

Other expenses are not so obvious. Cash allowances to adult children are a common budget leak. Retired parents need to have a heart-to-heart with their adult children on how their gifts could potentially negatively impact Mom and Dad’s retirement.

Also, review and request insurance proposals for health, home and auto. I usually find new insurance vendors with better offers. Or, if it makes sense, try increasing the deductible. Increasing deductibles can save you money on premiums. This assumes you have the cash to meet the higher deductible when you file an insurance claim.

If you are still paying for life insurance, does that still make sense? If the mortgage is paid off and kids out of college, perhaps reallocating premium dollars to long-term care insurance might make more sense.

2. Next, find ways to reduce your taxes.

Scour your income tax returns for leakage. Are you offsetting income with losses? Taxpayers can use $3,000 of investment losses – if a stock or mutual fund lost money – against ordinary income. If you give to charity, are you giving in the most tax favorable way? Donating a high-flying stock may make more sense than giving cash. Donating stock to a qualified charity gets you out of the stock position without incurring taxes from selling. This way your cash, which you would have donated, is instead preserved for your living expenses.

For those with consulting or self-employment income, are you saving in a tax-favorable retirement account? Contributions to a Self-employed (SEP) IRA are tax-deductible, reducing your taxable income and increasing savings for future retirement needs.

3. Focus on total portfolio income.

Many retirees have interest and dividends reinvested back into the portfolio. Instead, try having all portfolio income paid out to you. Each week my retired clients receive a physical check or a wire to their bank account from the interest and dividends generated from their portfolios. The advantage is clients never touch their principal. The downside is the portfolio may not grow as much if dividends were reinvested. That is a trade-off. Many retirees prefer to take the income instead of touching principal.

The key to all of this to understand is that the old way of retirement income planning – company-provided pensions, high-interest CDs or working longer – is unfortunately not as reliable as it used to be. Today, retirees must work a little smarter and harder.

If you are feeling uncertain about your retirement income plan, I encourage you to speak with a qualified, experienced financial adviser. Sometimes the answers are right in front of clients, they just need someone to help point them out.

Author: Michael Aloi

Source: Kiplinger: Boost Your Retirement Income in 3 Steps

It was a brutal start for stock investors in 2020. February and March saw some of the worst one-day point drops in the Dow’s history. April may be just as volatile. As bad as it is, there are lessons we can learn from the recent stock market downturn that can help us in the future.

These lessons, or themes as I call them, have popped up before in past bear markets. Investors are wise to learn from their mistakes. Here are five lessons, or themes, I’ve learned from my 20 years of managing clients through past stock market crashes:

1. Asset allocation does work

I find many investors don’t spend enough time getting the right mix of stocks to bonds. We call this asset allocation. That is a mistake. All the major equity markets were down for the first quarter, but U.S. Treasury bonds held up. Lesson learned, spend time on your asset allocation. Make sure your mix of stocks and bonds is appropriate for how much risk or downside you can stomach. There are several online risk calculators that can help. My firm uses stress testing software to see how a client’s portfolio behaved in past crashes.

2. Diversification can work too

So far gold did well when the stock market didn’t. We saw this in 2008-09 as well. That may not always be the case, but gold does have a history of shining at the right times. True, gold does have its disadvantages, namely it doesn’t pay dividends and there are costs to owning it directly. The point is diversification — owning different assets that hopefully perform differently — can smooth out the overall return over time. The table below shows how a diversified portfolio performed over the years. Notice the diversified portfolio (in the white boxes below) is never the best nor the worst performer: Its performance has always fallen somewhere in the middle.

Figure 1

3. Not all bonds are created equal

Many investors — and portfolio managers — stretched for higher yields and bought riskier bonds. Riskier bonds didn’t behave like bonds on the way down, however, but more like equities. In times of extreme market duress and panic selling — risk off , as we call it in the industry — the only bond that has held up is the U.S. Treasury. My advice: Make sure your bonds are bonds and not equities.

4. Hedging strategies can help

Owning some downside protection is appreciated in market panics. Institutional investors know this. That is why many of them hedge their positions. One type of hedging involves holding stocks — we call this being “long the market” — and “shorting” a small percentage of the market. Shorting hopes to profit when the market falls. Hedging is costly, involves risk and often limits your upside. It is not for everyone. However, most long-short equity strategies did hold up during the downturn. For this reason, I may recommend a small percentage of a client’s account be invested in retail long-short equity mutual funds.

5. Guarantees are appreciated in market downturns

In times of great uncertainty, when panic overtakes us all, and the toilet paper is missing from the shopping aisles, it is reassuring to have some guarantees in life. Recently when the Dow lost almost 13% in one day, I was grateful my whole life insurance has a guaranteed account, that is peace of mind.

I am also grateful my clients owned annuities with guarantees. Some annuities provide guaranteed income, while others a guaranteed return. Either way, guarantees are nice to have in times of extreme market panic.

Final thoughts

There are many lessons learned from the recent stock market sell-off. These five have helped me get through past bear markets. While I can’t guarantee what the next bear market will look like, there is a good chance these five themes will pop up again. It’s like that old adage, fool me once.

Author: Michael Aloi

Source: Kiplinger: 5 Bear Market Lessons Learned from 20 Years as a Financial Adviser

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