| Whether your retirement income is fixed or variable, | | | | cash, income and growth options. Portfolio |
| guaranteed or not, inflation and taxation act to | | | | diversification addresses many challenges of investing |
| reduce the real value of it. Indeed, one of | | | | and risks of retirement by addressing the risk-return |
| retirement's major challenges is preserving the real | | | | trade-off. Investing seeks to ensure capital growth, |
| value of retirement income. Having guaranteed | | | | while portfolio diversification emphasizes balance and |
| lifetime income is not enough, by itself. Protecting | | | | prudence. After all, it makes little sense to reduce the |
| your retirement income from inflation and taxation is | | | | impact of inflation while over-exposing your portfolio |
| critical in decreasing your longevity risk. Fortunately, | | | | to market risk. |
| you can do this in a few ways. | | | | == Reduce your early withdrawal rate from |
| == Use immediate annuities == | | | | retirement savings == |
| Purchasing an immediate annuity can help with | | | | Your retirement savings links to your retirement |
| reducing estate taxes and income tax. Immediate | | | | income, especially if you use retirement savings to |
| annuities liquidate part of your estate in exchange for | | | | provide income. If you reduce your withdrawal rate |
| a lifetime income. Sometimes, you can reduce the | | | | from your retirement savings in the early stages of |
| value of your estate below the taxable threshold by | | | | retirement, you ensure that more money can work |
| purchasing an immediate annuity. As far as income | | | | for you. This helps to preserve the value of your |
| tax, the income that you receive from your | | | | income and ensure that you have more savings to |
| immediate annuity contract is not taxable. Some | | | | withdraw from when inflation severely erodes the |
| immediate annuities have their payouts linked to | | | | real value of your income. |
| market performance. Where market performance | | | | == Allocating investments differently == |
| outstrips headline inflation, such immediate annuities | | | | You can merely exchange financial instruments within |
| help to reduce inflation risk as well. | | | | your portfolio to make a favourable tax claim. |
| == Investing == | | | | Municipal bond swapping is a clear example of this. |
| There are several reasons why you must invest | | | | The idea behind bond swapping is that you can sell |
| after you retire. However, significant reasons to | | | | your bond and buy a similar bond at just about the |
| invest include creation of real returns and another | | | | same price. However, once you sell the old bond at a |
| source of retirement income. Growth options, | | | | loss, then you can claim on that loss- even though |
| although they expose the retiree to market risk, help | | | | your portfolio has not changed fundamentally. For |
| to offset inflation. Using income from investing is a | | | | example, if you bought a bond at $50.00, sold it for |
| good idea, since capital gains taxes are appreciably | | | | $40.00 and bought another similar bond for $40.00, |
| lower than income tax. If a retiree has an annuity | | | | you can claim on the loss of $10.00 for the original |
| that reaches the annuitization phase, it may be | | | | bond. However, the integrity of your asset allocation |
| better to take the lump sum and income option and | | | | remains intact. |
| invest the lump sum. This is because the income | | | | With longer periods in retirement, safeguarding the |
| from the deferred annuity may be taxable and the | | | | value of your retirement income is as important as |
| capital gains tax from investing would be easier to | | | | having guaranteed lifetime income. Financial prudence |
| bear. | | | | in retirement can reduce your income tax, estate tax |
| == Portfolio diversification == | | | | and reduce the inevitable impact of inflation- |
| This is the distribution of your savings and | | | | particularly in the latter stages of retirement. |
| investments across the three main asset classes: | | | | |