Ask Carrie by Carrie Schwab-Pomerantz

Dear Carrie: I'm 83; I have always invested; and now I want to make sure I have stable income for the rest of my life. Where should I put my money? —A Reader

Dear Reader: This is a great question, especially in light of the most recent Retirement Confidence Survey conducted by the Employee Benefits Research Institute. In that study, only 35 percent of retirees believe they have enough money to cover basic expenses. When it comes to having enough for medical and long-term care costs, the percentages dip even lower. So a retiree of any age should be looking carefully at ways to maximize — and stabilize —retirement income.

There are several ways to create stable income. Central to your security will be having enough cash on hand to comfortably handle your short-term needs. Then, once this reserve is in place, you can look at how to invest the rest of your assets to keep more cash coming. Here are a few suggestions.

 

HAVE A YEAR'S WORTH OF CASH EASILY ACCESSIBLE

First take a realistic look at your expenses. What do you generally spend on things such as housing, food, transportation, insurance and medical care? Now subtract any regular income you get, such as Social Security benefits, pensions or real estate. How much more do you need? Ideally, you want to have enough cash to cover at least one year's worth of expenses in an easily accessible account, like a checking or savings account. Think of this as your spending money.

 

KEEP ENOUGH FOR THE NEXT TWO TO FOUR YEARS IN SHORT-TERM INVESTMENTS

On top of one year's worth of cash, I'd also keep enough to cover another two to four years in short-term investments such as CD's, Treasury bills or highly-rated municipal bonds. For instance, a ladder ranging from 6 months to 4 years would give you predictable access to your money. In today's interest environment, you may not get significant returns, but the main point is stability, not growth.

 

LOOK FOR SOME GROWTH

Once your cash needs are covered, if you have additional assets to invest, you can consider investing in stocks. Although it's generally appropriate to become increasingly conservative as you age, it's still a good idea to have some exposure to the stock market for growth as well as inflation protection.

And if your stocks pay dividends, that can be another potential source of income.

 

YOU CAN ALSO CONSIDER AN IMMEDIATE FIXED ANNUITY OR A CHARITABLE REMAINDER TRUST

Putting a portion of your savings into an immediate fixed annuity is another option. You invest a single amount and you're guaranteed an income stream of payments for life or for a set number of years. However, while the idea seems simple and appealing, annuities are complex and can be costly. Before you go this route, it's a good idea to work with a financial or tax advisor to help you compare the rate of return to a CD ladder or other fixed income investment. Also, make sure you understand the terms and fees before investing.

If you are looking for a tax break and are sure you can afford it, you could also consider creating a charitable remainder trust. This is a special tax-exempt irrevocable trust in which you transfer cash or assets to the trust, get an immediate tax deduction, and receive income for life or for a certain number of years. Once the time period is over, the remainder of the trust is transferred to a charity or charities that you designate. This can be a good tax and estate planning strategy as well as a way to support a favored cause, but be sure to talk to your tax advisor.

 

SIMPLIFY INCOME MANAGEMENT

Once you have all your income sources in place, I suggest consolidating your income in a single account to make managing your daily cash flow easier. For instance, deposit your Social Security benefits, pension or any other source of income other than your portfolio into one account. Deposit income you draw from your portfolio, such as dividends and interest, into this account as well. In this way, you'll always know how much money you have on hand and can keep a handle on your spending.

 

DON'T BE AFRAID TO USE YOUR MONEY

With interest rates low and the economy uncertain, it's understandable to want to protect your money. But most retirees have to start tapping their principal during the later years of retirement. And after all, isn't that what it's there for? The main thing is to do it wisely and with control—that's your true stability.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of "It Pays to Talk." You can email Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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