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Money Matters


By MARY LYNNE DAHL , Certified Financial Planner ™ Retired


November 03, 2021
Wednesday PM


jpg Money Matters by Mary Lynn Dahl

Mary Lynn Dahl

(SitNews) Ketchikan, Alaska - For most people, retirement means getting income from any/all retirement plans that have been accumulated during the working years. Some people get a pension, and sometimes that pension is adjusted annually for inflation. This is called “inflation proofing”. It results in annual increases that are designed to offset the increased costs of living, like groceries, utilities, gas, heating fuel, clothing, medications and travel, just to name a few of the routine expenses of life. Over time, inflation can do a lot of damage to the monthly income that a retiree has to depend on, so “inflation proofing” is not just a good idea, it is a necessity.

Nowadays, however, fewer and fewer people actually have a pension, of any kind, upon retirement. Instead, they more often retire with a 401-K plan, a 403-b plan, a deferred compensation plan or a combination of plans. In addition, many retirees have an IRA or ROTH account as well. All of these retirement plans can and should provide income at retirement, but how much income will depend on how each plan has been and continues to be invested.

This is where a withdrawal strategy becomes very important. A solid withdrawal strategy will take inflation into consideration, and protect your purchasing power for the decades after retirement, so it is key to making your money last. How do you get inflation protection on the income from your personal investments and retirement plans if you retire without a pension, which is now commonplace for most people?

First, you have to be aware that you need inflation protection. Believe it or not, many, far too many people, do not understand this concept and simply ignore it. The result for those people is often the realization five or ten years after retirement, that they no longer have enough income to pay their routine expenses. They begin to feel the financial pinch, and it gets hard. Don’t make this mistake. This article will explain how to avoid it and succeed at “inflation proofing” your retirement income. Read on.

Long before retiring, it is important to have a diversified portfolio of investments that are different, each one from the others. Some of your investments should produce dividends, some should pay interest, royalties or rent, some should grow in value and others should hedge against market volatility. If you lack diversification, your investment portfolio may or may not keep up with inflation.

For example, if your IRA is invested completely in CDs, it will not grow in value, because a CD only pays interest. CDs are valued in dollars, not shares, and dollars do not grow in value. In fact, dollars lose value over time (due to inflation!) Bonds have the same characteristics as CDs, because they too, pay interest and generally do not grow in value, at least not often or much. A CD is a good place to put your money if you need a guarantee of cash on hand/dollar value. It offers liquidity and is considered safe, but those dollars will not grow in value against inflation. Dollars are always valued as dollars, not shares, and they are always losing value over time, no matter how many of them you have.

Bonds, although they also pay interest, do move up and down in value, but when they move up in value it is often temporary and slight, so they likewise do not offer protection from inflation. Additionally, bonds can be very risky. As investments, bonds and cash/CDs do not offer protection from inflation.

Stocks frequently pay dividends, which are paid from the earnings of the company. In addition, stocks have historically grown in value, so they do offer protection from inflation. Stocks come in all sizes, types, categories and risk levels. Investors can select stock mutual funds that are conservative, moderate or aggressive. All of them have the potential to grow in share value and many do pay dividends of higher rates than CDs and bonds. Thus, owning shares of stock in a retirement plan can provide income plus growth and protection from the loss of purchasing power (inflation) in your portfolio as time passes.

Real estate is considered a pretty good hedge against inflation. Rental property can provide a good source of retirement income and when rents rise, the owner gets more income. Real estate has holding costs, however. Roofs and water heaters need replacing, systems break down and must be repaired, maintenance and upkeep is vital to being able to rent a property and there are always taxes and insurance costs associated with owning real estate. It is, therefore, profitable but not for everyone. Some people cannot handle the stresses of owning real estate, and should not purchase rental properties. The solution to this problem is to own real estate in a mutual fund, and many investors have discovered that they can have the benefits of real estate as an investment with funds instead of individual ownership.

That brings me to the actual withdrawal strategy that can produce income when you retire plus grow the principal over time, which will produce even more income if your strategy is well designed. Keep in mind that I said “well designed” because that is key.

In past decades, it was traditional to live off of the income produced from bonds that paid interest. This was considered conservative and safer than using stocks and real estate to get income, and in the past, it may have been true. Today, with interest rates at 1% to 2% or even lower, a portfolio of bonds/CDs and cash cannot provide enough income for many retirees. In addition, with inflation higher than these interest rates, the principal will not grow in value and the investor will gradually lose significant purchasing power. It’s like going broke slowly. You may have a lot of dollars, but if they buy less and less every year, you are going to end up not being able to afford your lifestyle.

A solution to this problem is to use a “total return strategy” to get more income from your investment portfolio during retirement. What then, is a “total return strategy” and how does it work? Is it risky?

A “total return strategy” begins with a portfolio that produces a mix of dividends, interest and appreciation (growth in share value). The concept is that the principal of the portfolio will grow by some percentage more than the withdrawal rate, in order to offset inflation. Let’s say your plan is to withdraw 4% from your portfolio per year and that inflation is averaging about 3% per year. That means that your portfolio needs to produce a total return of at least 7% for it to be sustainable. If it does, you take your withdrawals of 4% (per year) and the principal continues to grow at 3% over your withdrawal rate of 4%. Next year when you take your 4% withdrawal, it will be larger because it will be on a principal amount that is larger than the previous year.

To be able to get 7% per year on average, you need to determine how much your investments are actually producing from dividends and interest, specifically. If they do not produce the total dollar withdrawal amount you need, you should consider some changes in your portfolio mix. Start by looking to add or increase the amount of growth stocks in your portfolio, as a source of income.

For example, if you have a portfolio in which 25% of your funds have grown in value by 20% and 75% of it has grown by 8%, the total return of the whole portfolio is 8.2%, so you can use some of that growth in share price (by selling shares) to create income. To do this successfully, it is a good idea to review your portfolio once or twice a year and meet with your financial planner to confirm that the strategy is working and is neither too risky nor overly conservative for your specific needs.

Note that when the market declines in some years, your withdrawal may decrease also, but in other years, the market may rise far more than anticipated, making the possible withdrawal amount greater than expected. Some years will, indeed, provide you with a surplus, so these years are how you can build a cash kitty to offset those years that happen in a market decline.

This brings me to another key point with this strategy. Using a total return withdrawal strategy enables the individual using it to build a kitty for rainy days, and in doing so, it is a very good idea to build that kitty to a cash amount equal to an entire year’s income needs. This is advice for retiring or retired people, not the very young investor just getting started. It is a safety net you may need in retirement, specifically because you no longer earn an income from working.

If you do this, you will generally always have enough cash to live on for a year and be able to weather a bad market year without stress, having to cut back on your expenses or making major changes to your investments. In some cases, I have observed investors using a “total return strategy” that accumulates not one but several years of income needed. Even though that cash will earn little or no interest, it is your safety net and should remain as cash, totally liquid.

Many people are capable of making this strategy work without professional help, but most do need some help in figuring out how to build, balance and rebalance the portfolio to accomplish this goal. If done correctly, it is very effective and is being used widely today to create more income than could be produced from dividends and interest alone. If you work with a competent financial planner who will work out a withdrawal plan for you, it is definitely worth your while to have a discussion about using a “total return strategy” to accomplish your income goals. Please make sure he or she is a fiduciary, is paid only on a fee for service basis and will not receive sales commissions for investment recommendations that are part of the plan. These credentials will give you a high degree of assurance that your advisor is objective and will act in your best interest above his or her own interests and give you a solid strategy for making your retirement years financially secure. It may also allow your money to outlive you, leaving a legacy to your heirs or favorite charities, if you wish. Most people do like the idea of leaving some kind of legacy, if possible, and this strategy greatly increases your ability to do just that.

So, this is how many smart investors are managing to get the income that they need from their investment portfolios, even if bonds and banks pay very little in interest. They invest enough of their portfolio in growth, periodically cash in on some of that growth, and build a cash kitty to live on for a year, sometimes longer. They will continue to get growth, for the future, as an offset to inflation, and when interest rates rise, they can use that interest as well, for their retirement income. These investors are able to retain their financial security and offset inflation at the same time. In today’s low interest rate environment, this strategy can plug the gaps in income that many investors are facing. Give it serious consideration of you are one of them.


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©2021 Mary Lynne Dahl, CFP®

Mary Lynne Dahl is a retired Certified Financial Planner  TM . She is a partner and founder of Otter Creek Partners, a fee-only financial planning and investment advisor firm in Alaska. These articles are generic in nature and are accepted general guidelines for investment or financial planning and are intended for educational and financial literacy purposes only.  

Mary Lynn Dahl can be reached at


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