Some people worry they’ll be bored and not know what to do with themselves during retirement. Others have a long bucket list and can’t wait to start doing the things they didn’t have time for during their working years. No matter how you envision your golden years, we’re guessing you probably don’t want to be limited by your finances.
Developing a plan to generate steady income in retirement is essential. Retirement income planning can seem like a daunting task, but there are tools and resources that may help you plan and pursue your financial goals.
There’s a lot to think about as you prepare to draw down retirement savings. 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 things to consider when planning for retirement income:
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. Some investors say companies with a reputation for raising dividends are worth a look. The power of compounding also applies to a company that hikes its dividend on a regular basis. But dividends are never guaranteed and there is always a possibility a company could halt or lower its dividend payment. Just be sure to check that dividend yields outrun the yield on the issuer’s corporate bonds. Otherwise, you may want to consider the bond department for fixed-income investments.
Steady Stream of Income. Few words in the English language may mean as much to retirees. While some people might think dividend-paying stocks and bond ladders have less risk than other investments, there are different risks you should consider with each. Retirees may want to consider investing a portion of their portfolio assets in an annuity as a possible way to create a life-long income stream to help ensure you will always have enough cash flow to cover your essential expenses. 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, can 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 let 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 deal with Individual Retirement Accounts (IRAs) and 401(k)s: Age- and tax-related rules mean you must 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. The 4% Rule can serve as a good starting point for determining a draw down strategy, but there are some things to keep in mind when using it.
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, your withdrawal is tax free. Be sure to consult with a tax professional to determine how taxation applies to your situation.
Time to Consolidate Accounts? One way that could make it easier to manage your retirement income is limiting the number 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. Plus, having all your accounts in one place could be simpler for your heirs.
Wherever retirement takes you and whatever you want to do, you deserve to enjoy the life you’ve worked hard to achieve. Generating income in retirement through a portfolio that works for you, and pays you, might be a way to help you to do that. There are many potential retirement income strategies to consider. Here are some tools and resources that may help you along the way.
Editor's Note: This article is an update of the original Seamless Shift: Retirement Savings Turn To Income published on November 3, 2015.