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Working Out a Safe-Money Strategy


Businessman taking business card from his walletBefore you can come up with a solution to your financial problem, you need to figure out what the problem actually is: lack of income, growth, financial illiteracy…

Having a “safe money” strategy is key to a secure retirement, say Chris Bennett and Michael Abbott, co-founding partners of The Abbott Bennett Group, (www.theabbottbennettgroup.com). It’s important to be able to create an income stream that the retiree won’t outlive. There are several areas you and your financial professional can focus on as part of an overall “safe money” strategy, Abbott and Bennett say. Here are two examples:

  • Rate of return vs. sequence of return. The average rate of return on an investment can be misleading, they say. That’s because in reality how well you hang onto your money depends more on “sequence of return.” That is, exactly when do those profits and losses come about?

To see how that might work, imagine a 50 percent loss followed by a 50 percent gain. That would appear to average out to a zero rate of return. But that’s not how it would look in your portfolio, Bennett says. If you have $100,000, a 50 percent loss drops it to $50,000. The market rebounds with a 50 percent gain. But a 50 percent gain on $50,000 just increases that investment to $75,000, so you’ve still taken a loss.

Now consider that kind of activity over the course of your retirement as you are also withdrawing money from your savings to live on. Depending on when market fluctuations happened, you could take major hits. That’s especially true if the dips come early in retirement when your savings are at their peak, and the rallies arrive late when there is less left in the account.

Abbott and Bennett say there are tools that a good financial professional uses that can help people reduce the risk created by sequence of return.

  • Maneuvering toward tax-free income. “Whatever the tax rates may be in the future, taxes can be a drag on your savings and may adversely impact your retirement security,” Abbott says. So it’s important to consider the tax implications of how you hold your assets.

Even those Social Security benefits that retirees draw can be taxed, but they don’t necessarily have to be, Bennett says. Once again, a financial professional can review strategies that could help reduce or even eliminate the tax on that monthly Social Security benefit. HBM

Michael Abbott is co-founder of The Abbott Bennett Group, LLC, an independent financial services firm, where he serves as CFO. Christopher Bennett is the CEO of The Abbott Bennett Group, LLC, since 2003. Visit www.theabbottbennettgroup.com.

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