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By Christine Benz | 07-22-2013 11:00 AM

Psychological Road Blocks to Retirement Income

Financial planner Mark Balasa addresses why a total-return approach is more ideal for retirees than an interest-only strategy of the past and why investors shouldn't listen to short-term noise.

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Christine Benz: Hi. I am Christine Benz for Morningstar.com. Psychological impediments have the potential to derail financial planning during retirement. Joining me to discuss that topic is Mark Balasa from the firm Balasa Dinverno Foltz.

Mark, thank you so much for being here.

Mark Balasa: Thank you.

Benz: I'd like to talk about your retired client base in aggregate and kind of tap into some of the key behavioral pitfalls that you see your clients running into. And one in particular I would like to hear about is how they approach getting income out of their portfolio. So, I often encounter people who very much want to just live on the income that their portfolio kicks off and have that be their spending money. Let's talk about how common that is among your clients and how you kind of coach them about thinking about things a little differently and maybe using a total-return approach?

Balasa: You bet. What you described is so true. For so many generations, people would go into retirement with the idea that they would invest in certificates of deposit and bonds and dividend-paying stocks, they'd live off of that to the end of their days, and pass the assets on to their children.

Benz: And that was easier a couple of decades ago, right.

Balasa: So true.

Benz: Where you had CD yields so much higher.

Balasa: Yeah, I mean in 1981 yields on CDs were in the 15%, 16% range. So to your point, inflation was high, but that's another conversation.

Benz: Exactly.

Balasa: But in terms of just a nominal return it was very attractive. And so you fast forward to today where there is no return on a money market and minimum return on bonds and CDs and so forth. And the idea of making a living off your portfolio in retirement is so difficult. And so with that in many cases, not all, but in many cases what it's encouraged people to do is to go out looking for things that just yield high, high-yield bonds, master limited partnerships. Many of the things are fine, but in the end what they don't appreciate is that a lot of risk comes with that.

And so kind of to your point, what we encourage people to do is instead of thinking about just the interest on an investment, think about the total return--the interest, the dividends as I mentioned a second ago, but in many cases what's more important is the capital gain. So, when you look at a portfolio from the perspective of a total return, it's much more balanced in terms of what risks you're taking as opposed to just interest-rate risk when you're looking for a yield.

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