A recent New York Times article discussed ways to improve your retirement with investments in low-cost index funds. While it’s hard to argue against lower-cost funds for your stock market investments,  particularly if they outperform higher-cost actively managed funds, the planning for earning high investment returns should start long before you choose a fund.

If you are ready to dive into more detail about how to improve your returns, keep reading. Following these steps will lead to more, and safer, income during retirement, driven in part by better investment returns.

improve your investment returns

1. Adopt a plan

Your retirement income plan is made up of several sources of income: dividends, interest, annuity payments and withdrawals. That income will be generated by applying your savings from a 401(k) or similar plan, personal investments in funds, stocks and bonds, and one or more deferred annuities. You built these assets separately. But with the right plan, they can all work together to provide reliable income while taking advantage of stock market ups-and-downs, and minimizing taxes. I have written extensively about how to put together an income allocation plan.

2. Allocate to your objective

The common advice is to create an asset allocation plan that divides your savings among cash, bonds and diversified stocks. If you want to have enough income through retirement, however, the better advice is to prepare an income allocation plan. Toward that end, identify a specific portfolio strategy for each savings source. For instance, put a portion of your personal savings in a high-dividend portfolio, and create a balanced portfolio for your rollover, or traditional, IRA.

3. Stay the course with safe income sources

The foundation of an income allocation plan is the creation of enough safe income to allow you to take more risk in the markets. Social Security is part of that foundation. Annuity payments paid for life are another. At the same time, you will be generating dividends and interest from your investments.

An important consideration: An income allocation plan does not attempt to match income to expenses. Create a separate spending budget that fits within your expected income. Ideally, your income sources will produce more than you spend each month, but a cash buffer will cover the times when there are unexpected expenses.

Whether the markets are rising or not, you will earn dividends from your personal savings investment. If the economy goes into recession and stocks fall, the balanced portfolio in your IRA (which will include a money market fund) can supplement your safe income with smart withdrawals until your stocks recover. And don’t forget the equity in your home, which you can access through a reverse mortgage or a line of credit. The best plans consider how every source of income complement each of the others.

4. Manage taxes

You can’t decide how much you will pay in taxes – the government does that for you — but you can manage your tax bill. Much of the decision will be determined by how comfortable you are with various types of income. Proper management of annuity payments within your income allocation plan can help reduce taxes on all your income, including Social Security. And you can take advantage of tax law to benefit your heirs as well. Your traditional IRA and 401(k) accounts come with rules about mandatory withdrawals, but those can be partially mitigated if you include QLACs in your portfolio.

5. Manage fees

A main point of the Times article I referenced above is that it pays to reduce investment management fees. You can justify higher fees if the performance is better, but as the article points out, actively managed funds often do not produce better results. That’s why I advocate a Stay the Course plan. Create sources of income you are comfortable with. And if you are in the market with some of your savings, stay in the market. Your advantage during the down times is that you will be perfectly positioned for the upturn.

A view of the whole

Our firm is an investment advisor because we do planning and not stock selection, which we refer to specialists. We believe that most of the pick-up in value is from the planning process and the five points above.

My next article will go into more detail about how you can make smarter retirement planning decisions with the right set of tools and analytics.

If you would like to talk to me directly, write to Ask Jerry and I will respond.