Creating Your Own Pension with a Liability-Focused Portfolio
November 4, 2010 by MJP
Filed under Investing for Retirement
Long time readers know that I am a big proponent of creating a retirement plan that provides income for your essential retirement living expenses with guaranteed, inflation-protected investments. After this part of your plan is funded, you can take more risk with the rest. It seems that professional financial and investment advisors are starting to understand this concept as well.
< The new approach in the investment advisory community is called “liability-focused investing.” Instead of constructing a retirement portfolio based on expected returns, the portfolio is built to meet expected retirement liabilities. The 4% withdrawal rate “rule of dumb” is out the window.
Does this sound familiar?
Another way of looking at this approach, according to the personal finance pundits, is building a do-it-yourself pension to fund the liabilities in your future.
A recent article in the Wall Street Journal summarizes different ways of creating your own pension, using inflation-adjusted annuities, CD’s and bonds. Another “build your own pension” strategy discussed in the article is this:
A “laddered” portfolio of Treasury inflation-protected securities, or TIPS, can help. Investors who buy TIPS that mature in each year of retirement ensure a steady income stream that rises with inflation and matches spending.
I say again, does that sound familiar? If not, you need to read my article on “Creating a Plan for Guaranteed Retirement Income.”
When you read the WSJ article (linked below), take a look at the chart comparing a traditional retirement investment allocation with a “liability-focused” allocation. I like the comparison but remain convinced that you need separate pieces: one for needs (no risk) and one for wants (some risk).
What do you think about liability-focused investing?
New Ways to Create a Gold-Plated Pension
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