The idea of retirement has changed. Today’s retirees are no longer confined to their porches sipping lemonade (unless that’s what they want to do). Boomers are redefining retirement, living their lives on their own terms, in their own ways. And one question that shouldn’t come to define retirement is: “Savings or income?”
While it’s important to consider setting a certain percentage of a portfolio aside to take care of the unexpected, there are also strategies that can be employed to allow for smart withdrawals and steady income. Here are five factors for you to consider:
Ding-Dong, the Dividend’s Arrived. Yes, at the end of the day, stocks (even the bluest of blue chips) are generally riskier than some bonds or bank CDs. But golden years that stretch over a few decades may mean considering income-generating stocks as part of an investment strategy, because that’s where dividends come in. Most advisors say companies with a reputation for raising dividends are worth a look. Just be sure to check that dividend yields outrun the yield on the issuer’s corporate bonds; otherwise, you may want to consider shopping in the bond department.
Steady Stream of Income. Few words in the English language may mean as much to retirees. While dividends and bond ladders are considered relatively low-risk income generators, they are not without risk. Retirees may want to consider investing a portion of their portfolio assets in an annuity as a possible way to create a supplemental income stream. If you decide to invest in an annuity, be sure to read the contract to understand the risks and costs associated with the annuity contract, keeping in mind that various riders, such as lifetime income riders, come with additional costs and requirements.
Nothing Wrong With Cash. The beauty of cash (even if you collect virtually nothing on it) is that it may be the ticket that lets you ride out a bad market. If you have to sell stocks at the bottom for income, you’re cutting into the growth piece of your portfolio plan. Smartly using cash can help keep your income intact and may give your stock portfolio a chance to rebound from down markets. However, cash is not immune to inflation, which erodes its purchasing power especially over time. And, sitting in cash for too long could cause you to miss part or all of a market’s upswing.
Withdrawal Smarts. Here’s the rub on Individual Retirement Accounts (IRAs) and 401(k)s: Age- and tax-related rules mean you have to take a Required Minimum Distribution (RMD) at a time prescribed by the IRS. But be conscientious about tapping these accounts, and, if possible, try not to take out so much that your tax bill chews up your savings. Industry standards suggest that 4% is a “safe” withdrawal amount (provided it meets your RMD requirement) to help lower the risk of running out of money in retirement. But you have to determine if that’s right for you.
The best advice here is to pay attention to withdrawal rules so you avoid penalties. Also keep in mind that pulling money out of traditional IRAs and 401(k) plans boosts your taxable income. This could make more of your Social Security benefits subject to income tax, pushing you over certain thresholds for higher tax brackets, and so on. Now, if you have a Roth IRA, a portion of your withdrawal may be tax free. Be sure to consult with a tax professional to determine how taxation applies to your situation.
Kiss a Teller Goodbye: Consolidate Accounts. Handling retirement income is also about ease. One way to give yourself a break is to limit the amount of savings, checking, money market, and brokerage accounts you have outstanding. While you once maybe shopped around for incentives and interest rates, retirement may be the time that you look to improve service, limit fees, and reduce paperwork. Of course you’ll also want to make account management, bill paying, and direct deposit as simple as possible. Today it’s easy to consolidate, as even your brokerage account may have ATM and bill-pay services. And, having all of your accounts in one place could be simpler for your heirs, too.
Wherever retirement takes you and whatever you want to do, you deserve to enjoy the life you’ve worked hard to achieve. Generating income through a portfolio that works for you, and pays you, might be a way to help you to do that. Here are some tools and resources that may help you along the way.