Last month we explored how many people retire later than they need to, or spend less than they could while in retirement. This month we will consider if you should take principal risk (usually stock market risk) and if so, how.

This is a key issue because when managed correctly, the appropriate level of risk can increase your retirement income by 27% to as much as 75%. Imagine having 40% or 50% more income from your investments right now without taking more risk!

HOW MUCH RISK, AND HOW TO TAKE IT

If you are going to take risk in your portfolio, which is reasonable with some portion of your assets, you must take the risk in the correct way. Investments which carry risk to principal (primarily stocks for this article) are truly designed as long term investments. The mistake made is not taking risk in the first place, but taking it in accounts you need to spend income from in too short a period of time.

As a result, for maximum income, we divide our client’s assets into four accounts. Each account is designed to create income over a five year period of time. Put most simply: account one provides all of a client’s income during the first five years of retirement, and would be invested only in ultra safe, guaranteed investments.

Imagine the confidence and security someone feels knowing exactly where their income for the next five years will come from, and that nothing can possibly interrupt or reduce that income. Now consider account two, though used for years six through ten, it has the same guarantees, just a higher income for a later date.

Under no circumstances should any principal risk be taken in those first two accounts. The income has to be guaranteed, without risk and without worry. So where do you take risk? Possibly in account three, and primarily in account four. As you would guess, account three is where your income in years eleven through fifteen comes from, and account four is for income in years sixteen through twenty and beyond.

If we consider the history of the stock market, we find that the longer your holding period, the better you do. In fact, while there have been a few ten year periods of time where the stock market had negative returns (2000 to 2009), there has never been a fifteen or twenty year period in history where the stock market failed to produce solid gains.

What this means is that if our clients want risk, we take it only in account four, and occasionally in account three. As the first five years expire, we then split account four into two accounts, and begin again, with four accounts, and a twenty year plan. This way, you never have stock market (risk) investments which you need to spend in the next ten years, and most of your risk investments are designed for use in fifteen to twenty years, exactly the time frame where stocks shine the most.

MAXIMUM INCOME ANALYSIS

So what can you do with this information? In short, you need to create your own plan and divide your assets into the four accounts we have described. After the accounts have been divided, select the investments most suitable for you, with the lowest risk in account one, and the highest risk (even if it isn’t in the stock market), in account four. It goes without saying you should consult with a professional for the best possible results.

We have designed this system to allow for the highest level of income mathematically and scientifically possible, which is why we call it the Maximum Income Analysis. When done correctly, your retirement income is at its highest, while your concern is never “will I run out of income?” but rather, “what do I do with all this money!”

William Jordan is a nationally recognized financial advisor and well known speaker on a variety of financial and investment topics. To attend his free Maximum Income Workshop, contact his office at (949) 380-8600 or online at www.WilliamJordanAssociates.com.