Creating Cash Flow in Retirement

By Jesse Anderson,

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At the close of the third quarter, the S&P 500 was down just over 10% for 2011. Retirees living off their portfolios may face tough decisions over the next few months when it comes time to make their next withdrawal. The standard 4% withdrawal rule faces added scrutiny each and every time the market declines. When portfolio income becomes a priority, it is time to abandon your customary mutual fund portfolio and find an investment strategy aligned with your objectives.

Typical investment portfolios consist of a mixture of stocks, bonds, or a handful of mutual funds. On an annual or quarterly basis, advisors will rebalance the portfolio freeing up the cash necessary for future withdrawals. After the process, retirees have the cash available to spend over the next period. In appreciating or flat markets, the procedure should meet the needs of most retirees. However, if we've learned anything from the last few years, we will experience bear markets on average every 5 years. In these bad years, investors are forced to sell assets for a loss and give up any opportunity to regain this value in the future. Click here to read more about the devastating effect of reverse compounding.

Every time an investor is forced to sell assets at a loss to meet future withdrawal needs they jeopardize the sustainability of their retirement portfolio over the long-run. Using historical data and Monte Carlo simulations, advisors were confident that retirees could take an annual inflation-adjusted 4% withdrawal with little chance of running out of money. However, even the best simulations did not expect retirees to experience both a technology bubble and financial crisis in such a short period of time. Those people that retired just prior to these events experienced large initial declines and a very unfavorable sequence of returns .

It is time for Baby Boomers with an income objective to abandon the capital appreciation model. The Buy and Hope strategy only works as markets are going up which doesn't happen all the time. We've created an investment strategy centered on cash flow with a core objective of avoiding selling stock at a loss. Our approach to income involves the use of exchange-traded options on common stock. Options are an important tool in an investor's toolbox for managing risk and/or creating cash flow from a portfolio. Traditional sources of income like bonds, dividend stocks , and real estate fall short of most investors needs. When 4% just won't cut it, and you're tired of being at the mercy of the market, I encourage you to find a better solution .

The intent of this article is to help expand your financial education. Although the information included may be relevant to your particular situation, it is not meant to be personalized advice. When it comes to investing, insurance and financial planning, it is important to speak to a professional and get advice that is tailored to your unique, individual situation. All investments involve risk including possible loss of principal. Investment objectives, risks and other information are contained in the Snider Investment Method Owner's Manual; read and consider them carefully before investing. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance Retirement
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