Are You Strangling the Goose That Lays the Golden Eggs?

If you’re like many retirees–or those soon to be retired–your investment portfolio has probably taken a big hit in the recent market meltdown. Even traditionally conservative investments such as municipal bonds and dividend-paying preferred stocks have behaved in unusual ways.

While you can’t control the markets, you do have some control over how and when you take withdrawals from your portfolio. And without even knowing it, some folks are strangling the very goose that lays their golden retirement nest eggs.

The problem arises when portfolio withdrawals are made by liquidating otherwise good investments that have dropped in value. Once those investments are sold, any opportunity for recovery in value is lost, making the losses permanent and resulting in faster shrinkage of the portfolio.

Suppose that Jim and Barbara want to draw $1,000 a month from their investment portfolio to supplement their social security, pensions, and income from rental property. They’ll be smarter to draw from interest, dividends, and any stable portion of their portfolio (such as cash or money market).

The point is not that you shouldn’t draw from principal, but rather that you shouldn’t draw from the portion of your principal that is down in value. Of course, the flipside is that you should always have a portion of your portfolio in stable resources to continue providing your “retirement paycheck” even when times are tough.

Depending on your needs and how flexible you can be, you may need to have 2 to 3 years of living expenses in short-term, “safe” investments. As you draw on this cushion and use it up–if your more growth-oriented investments have recovered to some degree–then that’s when you liquidate some of them and replenish the safe money.

One of the most common flaws I see in retirement income planning is a generic across-the-board liquidation of portfolio investments regardless if they’re up or down. And unless you know some neat trick to always make your investments go up, then that’s pretty much a guaranteed way to prematurely shrink your nest egg.

Don’t get caught in that trap. No auto-pilot arrangement or standardized withdrawal model can substitute for an intelligent and tactical approach with your withdrawals.

Let the goose breathe a little and keep those golden eggs coming.

© 2009 Larry McClanahan

Larry McClanahan, MBA, CASL®, CFP® is an independent, fee-based advisor in the Portland, Oregon area, providing retirement income planning and wealth management to retirees and those approaching retirement. He can be reached at http://www.larrymcclanahan.com Advisory services and securities through KMS Financial Services, member FINRA/SIPC.

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In Tough Economic Times, Avoid “Get Rich Quick” Schemes

Let’s face it - today’s economic situation is scary. Having entered into a full-blown recession people are more worried and afraid than they’ve been in years. Job loss and other recession-centered threats more and more people are looking for ways to make more and sometimes turn to methods that end up making matters worse. That’s why, in these current financial times, it’s important to beware of scammers, as hard times bring out more schemes to take advantage of consumers’ fear and desperation. To help avoid going after rip-offs, follow these important tips:

1. Remember there is always a direct correlation between return and risk. If you are presented with a high return option of more than 10 percent return per year, keep in mind that this option is also going to be ultra risky.
2. Beware of unsecured promissory notes - whatever the promissory note purports to be, it should be protected by a recorded trust deed with your name on it; if not, then it’s most likely a fraud.
3. Be wary of securities scams involving foreign currency trading (or FOREX) - FOREX is a legitimate business that trades more than $1 trillion every day, but a number of scammers center on it, pushing their “proprietary” trading methods and arranging to use your money and then split the proceeds. Many of these scammers will make money in the first few days of trading to help build your confidence in them, then when they lose, take your money and use it to pay back someone else they have scammed.
4. Be cautious of banking-related schemes that offer higher returns than normal.
5. Beware of equity stripping schemes - these scams involve borrowing more than something is worth (such as a house or car) and investing the difference in an item that promises high returns.

Any opportunity you are presented with should be checked out before you invest in it - not after, when things might be skeptical, do your homework, and always ask for lots of documentation. Do background screenings on any investment “guru” who promises to make you money if you give him or her money. Call the securities division for your state and ask for information on the person making you offers. When times get tough and cash seems scarce, the first and best place to go is not to a “get rich quick” scheme promising easy money. The best place to go is to your own Spending Plan to see where you might be wasting money that can be used more efficiently. As you track your spending, you will get in better control of your finances, which will calm fears and eliminate the temptation to look for money where it does not exist. What most people need to meet their obligations they usually already have sitting in a Spending Plan and only need to live by it to discover the money they need. The happiest people we know are those who have a Spending Plan, are tracking according to that plan and have secured their money in a safe place that brings them consistent, yet modest returns.

For more information on the power of a Spending Plan visit http://www.gomoneymastery.com

Money Mastery For Life offers great information on all aspects of your personal and small business financial needs. Check us out at http://www.gomoneymastery.com

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