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Middaugh: Smart use of variables can lead to right answers for retirement

Published: Wednesday, July 23, 2014 5:30 a.m. CDT

If you think back to your math classes in high school or college, you may remember that many of the problems involved the use of variables. Changing these variables around in any fashion would change the outcome of the problem. Similar situations occur in life all the time.

To illustrate: If you look at the need to manage your retirement income so that you can’t outlive it as a “problem” to be solved, you will need to adjust some variables to arrive at the solution you seek. That’s why it’s so important to be aware of the key variables involved in your retirement income planning.

What are some of these variables? Consider the following:

• Your investment mix: You might think that once you reach retirement, you can invest solely in income-producing vehicles, but you can’t forget about inflation. Even a low rate of inflation, such as we’ve had for a number of years, can seriously erode your purchasing power over time. That’s why you need to consider owning at least some investments that provide growth potential. Of course, you can change your investment mix at any time. For example, you might want to shift to a greater percentage of income-oriented investments as you move deeper into retirement.

• Your withdrawal rate: You’ll need to calculate how much you can afford to withdraw from your investment portfolio each year without depleting it prematurely. Your annual withdrawal rate will depend on a few different factors such as your projected longevity, your investment mix and your other sources of income. But you’ll want to be careful not to take out too much too soon. As was the case with your investment mix, you have the flexibility to adjust your withdrawal rate during your retirement years. 

• Your Social Security: You can start collecting Social Security benefits as early as age 62, but your benefits will be permanently reduced by up to 30 percent unless you wait until your full retirement age, which is likely 66 or 67. However, your monthly checks can increase if you delay taking your benefits beyond your full retirement age, up to age 70. If you come from a particularly long-living family, and you have sufficient income apart from Social Security, you might want to delay your payments to get the larger benefit amount. Once again, you have a choice to make. 

• Your earned income: Just because you’ve retired from one career, it doesn’t mean you’ll never again earn some income. Many retirees take part-time jobs, do some consulting or even open a small business. Whether you feel that you need to work, or you just want to work, the money you earn from employment can be an important component of your overall retirement income. 

As you can see, all these variables involve choices on your part. And how you choose to exercise each variable will affect all the other variables. Consequently, as you manage and monitor your retirement income, you’ll need to make many important decisions. Still, this doesn’t have to be a scary prospect – because the very fact that you have choices means you also have a great deal of control over your situation.

So, study your choices carefully as you work toward achieving the income you need to enjoy the retirement you want. 

• Steve Middaugh is a financial adviser with Edward Jones Investments. He can be reached at steve.middaugh@edwardjones.com, 815-356-5401, or at his office, 500 Coventry Lane, Suite 160, Crystal Lake.

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