How to: Maintain your purchasing power in retirement

CPA/PFS, MBA, MSTx, Founder, DiNuzzo Investment Advisors, Inc. of Beaver, Pa. Special to PRIME You've more than paid your dues. You've had a lengthy, productive career. The kids are gone, fending for themselves. The mortgage is finally paid off. It's time for you and your spouse to retire, kick back and enjoy the fruits of your labors. Not so fast. It might be time to rethink that. Stagger those retirement dates! The biggest risk would-be retirees face occurs in the first couple years after they stop working. This "bad-luck factor" refers to things outside the investor's control, such as retiring at the beginning of a bear market. Just as there's no real way to time the market, there's no way to know when a bear market is about to begin. If the market happens to drop sharply, retirees might find their seemingly comfortable nest egg a little thin. The best way a couple can counteract that is by staggering their retirement dates. For example, if a husband continues to work for two years after his wife retires, it can solve a lot of problems. For one thing, it keeps a guaranteed stream of income coming in a bit longer. Second, few downturns last more than 24 months. Even if the first spouse retires in the face of a decline, odds are the market will be bullish again by the time the other spouse stops working. Take a hard look at your plan Beyond staggered retirements, there are a few other things would-be retirees should consider. Building an extremely well-diversified portfolio is always a good idea. The stock/bond asset allocation should fall anywhere between 30/70 to 70/30, depending upon your own unique circumstances check with your financial adviser. Implement as many low fee/low expense passive index investments as possible. Be certain to have two to three years of withdrawals available in bonds or money market funds (and/or satisfied by interest or dividends). That prevents you from having to liquidate equity or stock holdings if there is a prolonged downturn. Meantime, maintain "purchasing power" in your portfolio to offset inflation's impact via growth stocks. That means U.S. large cap, U.S. small cap, U.S. large and small value, U.S. and international real estate, international equities and commodities funds. On the fixed income side of your portfolio, establish a five-year investment-grade bond ladder. Consider money market funds, as well as more exotic investments, such as absolute return strategy, merger arbitrage and managed futures. Finally, when it comes to actually spending your retirement dollars, the ideal withdrawal rate is about 3.5 percent and should not exceed 5 percent. The 3.5 percent benchmark rate allows retirees to adjust withdrawals to compensate for inflation. Understanding these inherent, yet mostly controllable, risks and proactively managing retirement investor expectations can lead to more comfortable and rewarding golden years. P.J. DiNuzzo, CPA/PFS, MBA, MSTx, is founder, president and chief investment officer of DiNuzzo Investment Advisors, Inc. of Beaver, Pa. He may be reached at pjdinuzzo@dinuzzo.com or 724-728-6564.