How to Optimize Your Retirement Income.
This page is explains the Encore retirement income framework in detail. It’s where the four retirement investment strategies fit into the big picture. I recommend starting taking the retirement investment strategy diagnostic first. You can do it here.
The first step in understanding your Retirement Income Style Profile is to understand its framework. The Retirement Income Optimization Map provides this framework.
This dimension details how you prefer to source retirement income.
Income sources based on probability rely on market growth. This includes a traditional portfolio or other assets. They must meet growth expectations to subsidize your retirement.
Safety-First income sources are dependent on contractual obligations. These sources of income are more immune from market swings. A safety-first approach may include protected income sources. These are common in pensions, most annuities, and individual government bonds. This approach does not rely on expected market growth. Its income is contractually driven.
This dimension shows how flexible you are with your income.
Optionality reflects a preference for keeping your retirement income options open and your strategies flexible. A better economy, or a change in your situation, may warrant a shift in your plan. This preference aligns with retirement solutions that have no set holding periods. They should also allow changes to your retirement income plan.
On the flip side, a Commitment Orientation means a preference for committing to a retirement income solution. You care less about bad economic trends or a worsening personal situation. The solution meets a lifelong need for retirement income. The certainty of a dedicated retirement income solution outweighs the chance of higher returns.
These dimensions combine to identify your Retirement Income Style Profile
Your Retirement Income Profile reflects how you want to account for your goals and concerns.
Many retirement goals exist. This map classifies them into four categories. We call these “The 4 L’s of Retirement.” These categories represent both your goals and your retirement concerns.
Longevity goals aim to address a key retirement risk: outliving your money.
Most examples center on financial independence and knowing that you can pay your basic expenses and not be a burden to others. These include, but are not limited to:
Lifestyle goals seek to maintain your desired standard of living. They also aim to enjoy your retirement with more spending money. These goals need you to maximize your spending power.
This part of retirement planning is about keeping or improving your lifestyle. It’s not about being too conservative in retirement. It also includes spending on others without harming your retirement.
Typical lifestyle goals include:
Liquidity goals and concerns involve maintaining enough reserves for unexpected contingencies. The rainy-day account.
Maintaining enough liquidity is especially important when it comes to accounting for:
Legacy goals are about leaving assets to future generations or charities. They also include using your time and talents for good causes. The thought of leaving behind a legacy is a consistent theme here.
Typical goals include:
Your profile is directly related to your retirement concerns.
Those focused on Lifestyle goals prefer Probability and Optionality-based solutions. These solutions move toward the upper right quadrant. To address those concerns, you must take on more market risk and be more flexible with your income strategies.
Those focused on Longevity goals prefer Commitment-oriented solutions. These solutions fall toward the lower end of the quadrants. Contractual income sources, like an annuity, may require a big commitment to buy.
A general concern for all. But, those focused on liquidity prefer Safety-First solutions. These solutions move left on the quadrants. Safety-first income sources can provide needed liquidity in urgent moments. These solutions include but are not limited to cash options and insurance.
There is usually a low concern about legacy risks. But those focused on legacy goals prefer commitment-oriented and probability-based solutions. It seems that people may commit to bequests by earmarking assets. But they do so with volatile investable assets. For example, a parent usually opts to earmark a gift to a child with stocks, not a bond or annuity.
Reliable income sources are an essential part of drawing consistent income.
This section answers a key question in retirement planning: How can you create a reliable income floor that is safe from market volatility?
Reliable income streams are used to offset essential expenses and fund longevity goals. They determine your income floor in retirement. You can count on it, despite any bad personal or economic events.
There are ultimately two funding strategies for income floors. Funding an income floor for perpetuity. Or, funding a floor for specific periods of time, time-based funding. Time-based funding strategies are frequently referred to as “bucketing strategies.”
Research shows that, if your profile is in the upper right on the retirement income matrix, your strategy will prefer more time-based solutions. These include bond ladders and cash set asides.
If your profile is in the lower left, your income strategy shifts to income annuities. They provide lifetime, protected income.
These preferences show how to best use your tactics in your retirement income plan. Aligning your retirement income profile and tactics helps identify solutions.
The tactics used to install your Reliable Income strategy are:
The Diversified Portfolio section of the map reveals the degree to which you prefer to forecast future stock prices and market movements in order to maximize your retirement income.
Your diversified portfolio strategy reflects your beliefs about forecasting. Do you want to predict stock prices and market cycles? Or, do you prefer to just capture market returns?
These beliefs affect your implementation preferences throughout all aspects of your investment portfolio. Retirement income from your portfolio offsets discretionary expenses. It also covers any essential expenses not met by reliable income sources. We classify these investment preferences within your portfolio as Forecasting and Non-Forecasting strategy approaches.
Most people prefer a non-forecasting approach across all quadrants. But research shows that your forecasting orientation increases as you move from the top quadrants to the lower ones.
Below is a list of portfolio tactics. It is important to select ones that match your retirement income profile.
The tactics used to install your Diversified Portfolio strategy are:
Your Reserves section of the map shows how you prefer to handle any external shocks to your retirement income. These include a chronic illness, an unexpected death, or other costly events. Your reserves section is not for your retirement income needs. But, instead for potential spending shocks to keep your income plan running without major interruptions.
There are two main types of liquidity preferences: True Liquidity and Technical Liquidity.
True liquidity fans want assets set aside for unknown events. This involves the use of cash set-asides, buffer assets, and insurance.
Technical Liquidity fans prefer to sell investments that are not set aside to fund emergencies. Instead, lower priority goals are sacrificed to handle unknown events.
Most people favor a true liquidity-based approach across all quadrants. But those in the lower right quadrant tend to prefer technical liquidity. Also, those with tight retirement budgets might need technical liquidity. It requires fewer assets but a willingness to sacrifice low-priority goals.
Below you will find a list of reserve tactics. You want to select ones that align with your retirement income profile.
The tactics used to install your Reserves strategy are:
We will look at how your retirement income profile relates to four factors that shape your retirement income distribution. They are:
Longevity Aversion: This details how conservative you want to be with your portfolio withdrawals. Do you want to front-load your portfolio distributions? It will let you enjoy the early years of your retirement. Or do you want to back-load your distributions? This would ensure you always have enough to fund your lifestyle in the later stages of your retirement.
Preference for variable or smooth income: It asks if you prefer to focus on portfolio growth while retired. This may lead to a more uncertain and uneven retirement income. Or do you prefer a more predictable income that maintains your standard of living? It may lower your investment account value at death.
Portfolio Loss Aversion: It informs us about the return you need to offset higher investment risks.
Retirement Income Loss Aversion: It informs us about how much more retirement income you need to take on more risk in your retirement income.
Research shows that, as you move down the quadrants, your desire to backload your retirement income increases. This shows the traits of many commitment-oriented solutions. They provide protected income for one’s entire retirement.
Many prefer steady retirement income over asset growth. Research shows that, as you move up the matrix, you will accept more risk for a chance at higher asset growth.
Research shows that, as you move right in the Matrix, your aversion to portfolio losses lessens. This shows a decline in market risks with safety-first solutions. It also shows a rise in risks with more probability-based solutions.
Research shows that, as you move right on the matrix, your aversion to retirement income losses lessens. This shows the steadier income from contractual solutions in the safety-first quadrants. It also shows the more volatile income from market-driven sources in the probability-oriented quadrants.
Your Retirement Income Style Profile (your “Profile”) was compiled by Encore Retirement Education (“E.R.E.”). E.R.E. is not an investment advisor. In preparing your Profile, E.R.E. has relied upon the information provided by you in the Retirement Income Style questionnaire. Your Profile is intended solely to identify certain characteristics and personality traits that may be useful in identifying appropriate investment strategies. E.R.E. does not provide investment advice and does not play any role in matching Profile results with any investments, investment strategies, investment allocations, asset classes, or any other forms of investment advice.
Any and all general recommendations concerning investments, investment strategies, investment allocations, asset classes, or any other forms of investment advice are prepared by Encore Retirement Planning, LLC, a registered investment adviser. The content of this publication reflects the views of Encore Retirement Planning, LLC (Encore) and sources deemed by Encore to be reliable. Encore only transacts business in states where it is properly registered or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. Encore is not offering personalized advice or financial recommendations based on this analysis. Encore does not individually assess each Profile for the appropriateness of the general recommendations provided, but instead maps pre-defined Profile outputs against investments, investment strategies, investment allocations, asset classes, and other forms of investment advice which are deemed by Encore to appropriately align with such pre-defined outputs. While this report does highlight issues and areas that you may want to consider, these are general statements based on broad characteristics identified within your questionnaire and are not recommendations on your investment objectives or particular financial situation. For personalized investment advice based on your investment objectives and financial situation, you are strongly encouraged to consult the financial professional of your choosing.
There are many different interpretations of your Profile and many different ideas about how to best use them. E.R.E. is not a FINRA-member firm. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user.
The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation.
Past performance is no guarantee of future performance. The investment return and principal value of an investment will fluctuate, and shares owned by the investor, when redeemed, may be worth more or less than their original cost. Results illustrated in this report may vary with each use of the Profile, and with time.
Any investment involves significant considerations and risks that are described in each investment product’s prospectus. Each potential investor should obtain and read the prospectus from the investment company and should carefully consider the risk warnings and disclosures before making an investment decision.
IMPORTANT: The information generated by the report regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.