Back in our grandparents’ day, retirement didn’t require a lot of planning. You retired at age 65 and could pretty much count on a solid guaranteed monthly income stream (from the combination of Social Security and a company pension) to cover your essential expenses such as food, shelter, and clothing.

This allowed most people to use their personal savings and investments to generate income for other non-essential expenditures like entertainment and travel.

With most retirements lasting only 10-15 years, the investment landscape was simpler as well. You could afford to build a purely income-focused portfolio—drawing down 4-5% of your assets each year—and the likelihood of running out of money was remote.

Today, however, Americans are living significantly longer lives. According to the CDC, average life expectancy for a 65-year old male is 83.2, and 85.8 for a 65-year old female. That means you likely need to be prepared for more than 20 years of retirement.

Further complicating this equation is the gradual shift that’s taken place over the years from employer-funded pension plans to employee-funded 401(k) plans. As recently as 1980, 84% of all retirees were covered by an employer pension plan. Today, less than one-third of Americans retire with a pension plan.²

Responsibility for funding the lion’s share of retirement income is increasingly being left up to each individual.

So how can investors better prepare for this new reality?

A Fresh Perspective

First and foremost, it’s important to acknowledge that you need to take a more active role in managing your retirement assets. Planning for a 20+ year retirement means structuring your portfolio not only to provide enough short-term income, but also making sure that those assets you won’t need to touch for another decade or two keep growing.

Unlike previous generations, you can’t just transition your entire portfolio holdings to income-producing bonds and dividend-producing stocks as retirement nears. It’s not practical to have longer-term assets you won’t need to touch for another 10+ years invested the same way as assets you’ll be drawing down early in retirement. Both longevity risk and inflation risk require a longer-term perspective. Being too conservative can hurt. Decades of inflation can do serious damage to your portfolio—especially with interest rates currently near historic lows!

This is where a total return strategy comes in—seeking to strike an optimal balance between income and price appreciation to give you greater portfolio diversification, enhanced tax flexibility, and more income for a longer lifetime. How does the strategy work?

• Based on your short-term income requirements, you and your Janney Financial Advisor determine a high-level asset allocation.
• Instead of all fixed income, perhaps you and your advisor decide to allocate 40% of your portfolio to bonds and 60% to a diverse mix of stock funds.
• This allows part of your portfolio to keep growing while the other part generates income.
• Even if the stock market experiences a major correction, those assets won’t be needed for short-term income; they’ll have years to recover in value.
• And depending on market conditions, you can dynamically adjust where you draw income from each year. For instance, if the stock market is soaring, you may decide to sell some shares (generating income) to bring your allocation back in line.

As with any portfolio, you’ll want to rebalance your assets on an annual basis (or whenever your needs, goals, or circumstances change) to maintain your desired allocation. But rebalancing of total return portfolios also allows you to align your assets with your expected upcoming variable expenses for the year ahead—as well as consider the tax implications of liquidating various assets.

Additional Considerations

In order to reduce the pressure on their retirement savings to generate income, many investors turn to income annuities as an additional source of guaranteed lifetime income that can augment Social Security (in much the same way as pensions did for previous generations).

What’s more, by allocating a portion of your retirement portfolio to an income annuity, it gives you the freedom to be somewhat less conservative with the rest of your assets in pursuit of growth.

Don’t Go It Alone

After decades of saving and investing, it requires very different skills to convert all those income sources (Social Security, pension, tax-deferred 401(k) and IRA accounts, tax-free Roth IRAs, and taxable savings and brokerage accounts) into an income stream. Your Janney Financial Advisor can help you translate your needs into a thoughtful, comprehensive plan. And because different types of accounts have different tax rules, you’ll also want your tax attorney to weigh in and help you understand how and when it will be most advantageous to withdraw from each type of account.