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Cents and Sensibility Guy Steele |
How should you get income
from investmentsYou can invest for at least two key reasons: growth and income. If you're looking for growth, you'll need to invest in stocks that have the potential for capital appreciation. But if you also want to get income from your investments, you've got some choices to make.
You can, of course, invest in fixed-income vehicles, such as bonds. Bonds typically pay regular interest payments, and, as long as the bond is held until maturity, the principal amount is returned, provided the issuer doesn't default -- a risk you can greatly reduce by purchasing only those bonds that have received the highest grades from independent rating agencies.
However, you also can get income by investing in stocks that have a history of paying dividends; and now, since the tax rate on dividends has been cut, these investments may look even more attractive.
In the short term, most common stocks will typically offer lower income than bonds or CDs. But many high-quality stocks have consistently increased their annual dividends, which means you have the potential for rising income.
That's not to say you should abandon your bonds in favor of dividend-paying stocks. No matter how high the quality of the stocks, they will still carry more investment risk -- at least in terms of potential loss of principal -- than high-quality bonds. So, when you're investing for income, you will likely want to choose the mix of dividend-paying stocks and bonds that best fits your individual risk tolerance and long-term goals.
Strategizing in retirement
You'll always need to know how to get income from your investments. But it's particularly important to make the right choices during your retirement years. At this time of your life, you'll need to look beyond the issue of bonds vs. stocks to a new dimension: Which sources of retirement income should you tap first?To answer this question, you'll have to take stock of the sources of your retirement income. You can probably anticipate drawing from three main sources: tax-deferred accounts (such as your traditional IRA and your 401(k) or other employer-sponsored plan); taxable savings and investments; and Social Security.
The exact formula you choose for getting income from these three separate pools will depend on your individual needs and circumstances. However, it may be a good idea to spend down your taxable savings before you touch your tax-deferred plans. By following this strategy, you can keep these accounts growing on a tax-deferred basis until you must start taking withdrawals at age 70 1/2.
Tapping Social Security
When should you start taking these payments? Again, there's no single right answer; you'll have to weigh a variety of factors, including your other sources of income, your age at retirement and your expected life span.Keep in mind that, although you can start taking Social Security at age 62, your monthly checks will be larger if you wait until your full retirement age, which can be anywhere from 65 to 67. For every year past your normal retirement age that you delay collecting benefits, you'll get "bonus" payments, which can be substantial.
Once you reach 70, you'll have earned the largest monthly payment you're going to get.
Your financial professional can help you determine the appropriate strategies for drawing on your investment income and retirement plans.
Maintaining a sufficient level of income is obviously essential to your financial well being -- so you'll want to make all the right moves.
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Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688