Topic 4 – Managing Risk with Income Allocation

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So let’s take a minute here and review our asset allocation strategy and compare it to a new model called income allocation, and let’s apply it to little sister Jill. If we manage risk with income allocation, risks can be magnified when withdraws are made against the portfolio, if the balance is reduced due to negative market performance. We didn’t see that with little sister Jill in the previous slide, did we? If we apply this income allocation strategy, we earmark a portion of the funds to generate guaranteed lifetime income designed to remove the need to withdraw from the other portion of the portfolio that we just saw on the last slide. It will offer an income stream for either a single life or joint life for spouses. Some options offer increasing income potential to help offset those inflationary pressures we saw in earlier screens. So how do we manage risk with income allocation? Remember, risks are magnified when withdraws are made against the portfolio. If the balance is reduced to negative market performance, we end up with less money. In an income allocation strategy, we eliminate the risks, the three great risks, to a retirees portfolio of sequence of returns, risk withdrawal rate risk, and longevity risk. Let’s see how we do that.