Built to last: Generating income in the new retirement

Just as more sophisticated asset allocation strategies and approaches helped you grow your retirement savings, new thinking on asset allocation is now emerging as you prepare to start drawing down and spending these funds. Successful investing now refers to sufficient retirement cash flow. Risk is no longer defined solely by volatility; it is also defined by income shortages. In sum, you need a cash-flow plan that will help sustain your lifestyle in retirement while being flexible enough to absorb unforeseen expenses.

When figuring out your annual retirement cash-flow need, there are certain factors - beyond basic living expenses and the occasional indulgence - you should account for. Longevity is one. The Society of Actuaries, in their Annuity 2000 Mortality Table, suggests that for couples age 65 today, odds are that (assuming good health) at least one spouse will live to age 92, hence a need for long-lasting savings. Health care is another factor. Assuming Medicare benefits remain at current levels, couples in retirement if living to average life expectancy- and as much as $550,000 if living to age 95, according to the 2007 Retirement Confidence Survey of the Benefit Research Institute®.

In the face of longer lives and rising medical costs, if the fixed income component of your portfolio is too heavy, you could be increasing your risk of outliving your assets. An effective retirement portfolio certainly should generate an investment return that is high enough to meet after-tax expenses and outpace inflation while providing as much protection as possible. A periodic analysis of your asset allocation is important, especially once you begin tapping your accounts.

In the same way that members of the previous generation relied on pensions and Social Security to account for a large part of their retirement cash flow, today's boomers have an emotional yearning for a guaranteed source of income.

Certainly, assets in taxable investment accounts and 401(k) plans, IRAs, and other tax-deferred accounts will comprise the bulk of retirement income for many people. But since investment returns are not guaranteed, income from these sources will vary with market performance. So, even though investments and other wealth may negate the need for Social Security, they can't provide the same peace of mind.

It's no secret that the worst possible time to experience a market downturn is when you have the greatest amount of money at stake, which is typically right before and right after retirement. Retiring, coupled with a sudden market downturn, can result in a serious short fall in retirement income that usually can't be overcome using convention investments and asset allocation strategies. Allocating a portion of your portfolio to guaranteed income sources can be helpful in mitigating that risk.

According to Morningstar as of March 1, 2007, retirement cash flow have come from the following sources: 40 percent from Earned Income; 21 percent from Pensions; 19 percent from Social Security; 18 percent from Investment Income and 2 percent from other sources.

When it comes to your vision of retirement and the shift in needs that may accompany it, you should consider working with a financial advisor to create a plan and build a portfolio that is designed to sustain you for the long haul. For more information, call me at 689-8704 or william.a.creekbaum@smithbarney.com.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, a financial services firm serving Northern Nevada at 6005 Plumas Street, Ste. 200 Reno, NV 89509.