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Seamless Shift to Retirement: Build Income, Stretch Income

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April 15, 2016
The long winding road: Building and stretching income to cover your retirement

Steady stream of income. Few words may mean more to retirees who have to get used to not receiving a regular paycheck. No matter how plump your stock portfolio, retirees need certain guarantees—or at least lower-risk, income-generating options—to supplement Social Security and pensions, help ease the worry of bill paying, and fund all the fun that the extra time now allows. Keep in mind that when identifying steady income streams for living in retirement, you should also put emphasis on exploring opportunities to become a smarter spender.

Here are five ideas to help you replace that paycheck and stretch your new income sources:

1. Dependable Dividends. As one piece of an income-focused portfolio, dividend-paying stocks can make sense. Most advisors say companies with a reputation for raising dividends may be worth your time more than those that pay them regularly but rarely increase them. Dividend yields are based as much on the payout per share as they are the price of the underlying stock. Be sure to check that a dividend yield outruns the yield on the issuer’s corporate bonds; otherwise, you may want to consider shopping in the bond department. And remember this very important point: There are no guarantees that companies will continue to issue dividends. As was evident during the recession in 2008 and 2009, some companies can reduce or suspend dividends for a short period of time, or forever.

2. Pay for Guarantees to Help Ease Your Mind. 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 a guaranteed annuity as a possible way to create a supplemental income stream. Keep in mind that not all annuities are created equal. Annuities differ with distinctive features that serve various purposes. Plus, to build the annuity you want, you may need riders, such as a lifetime income rider, which come with additional costs and requirements.

3. Nothing Wrong with Cash. The beauty of cash (even at basement-dwelling interest rates) 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. And, sitting on cash for too long could cause you to miss part or all of a market’s upswing.

4. Withdrawal Smarts. Here’s the issue with Individual Retirement Accounts (IRAs) and 401(k)s: Age- and tax-related rules necessitate 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. Remember, too, that your withdrawal rates need to be sustainable over the rest of your life. Withdrawing too much could easily impact that steady stream of income you’re looking for and one long-followed standard, the 4% rule, may help you keep it constant. Keeping in close contact with your financial professional in retirement could free up your time and help ease your mind. In other words, the pros can help. There are plenty of rules and changing tax laws that can crimp your “take-home pay” if you have a misstep. For starters, pay attention to IRA and 401(k) 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, your withdrawal from the Roth may be tax free, dependent on certain circumstances. Be sure to consult with a tax professional to determine how taxation applies to your situation.

5.  Go for Ease. 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 painless as possible. Today it’s simple 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.

Find out more information on Retirement Income Solutions.