Adjusting to life without a traditional paycheck and planning for retirement income can be one of the most intimidating aspects of transitioning from working to retirement.
After decades of receiving reliable income from an employer, retirees suddenly must create their own “paycheck” to fund their lifestyles using their Social Security benefits, a pension (if they have one) and the savings they’ve managed to pull together through the years.
The income planning process may often start with complicated questions like:
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
- Should you file for your Social Security benefits at 62, delay until you’re 70 to get more money or choose something in between?
- If you have a pension, should you take a lump-sum payout — if it’s available — or go with the lifetime annuity option?
- If you’re married, how can you avoid putting a financial strain on the surviving spouse when one of you passes away?
But that’s just the start. If your Social Security benefits and pension won’t cover all your costs, you’ll have to find a way to cover that gap. And for many retirees, that could mean over-relying on investments that are inherently unpredictable.
Traditional Way of Creating Retirement Income Could Be Risky
Creating dependable cash flow from your retirement portfolio can be a daunting assignment. And doing it the old-fashioned way — with a withdrawal plan that assumes the markets will consistently provide what you need — could put your retirement at risk. A withdrawal strategy based on market performance is not necessarily an income plan.
Yes, the markets always recover from those nasty downturns … eventually. And so can the securities in your portfolio … with time. But what happens if, in the meantime, you’re depending on your investments to help pay your bills?
It’s important to keep a couple of things in mind as you plan your retirement income:
- It’s much harder to rebound from a rough patch when you’re taking money from your portfolio than when you’re putting money in. And if a downturn or bear market occurs at the start of your retirement, it could have a significant effect on how much money you’ll be able to withdraw each year. If you stick with the withdrawal rate you originally planned, it’s unlikely your money will last as long as you need.
- Prior to retirement, it’s not a bad idea to focus on the “average rate of return” in your portfolio. (In fact, it could keep you from going a little nuts as the markets fluctuate.) But once you retire, it’s the “annual rate of return” that counts. It won’t matter much that your portfolio averaged 8% per year while you were working and saving, for example, if you lose 20% in your first year of retirement and you’re relying on your investments for income.
So, what are some ways that can help you create more certainty in your retirement income plan?
Even if you dial back your exposure to risk in retirement — by moving to a 60/40 stock-bond mix, for example, or even 50/50 — you could run into trouble. The stock market can be a good place to put your money when you’re looking for growth, and time is on your side. But in retirement, it’s wise to seek out strategies that will help guard the money you’ll need to live on.
CD Ladder Could Offer Safety and Flexibility
One way to potentially accomplish this is with a CD ladder, which can offer both safety and flexibility. Though you can’t expect crazy growth with certificates of deposit, like your parents and grandparents did in the 1980s, you won’t lose money. And because you’ll decide how long each CD’s term will last, you can be sure there will always be some money available when you need it.
Another possibility to consider is fixed annuities, which can be reasonably secure and can provide a monthly paycheck for life (similar to your Social Security benefits or an employer’s pension). Purchasing the right types of annuities for your needs can be more complicated than some other retirement strategies, so it’s a good idea to seek advice from an experienced financial adviser. But putting an appropriate portion of your money into annuities can be a useful way to shield yourself from the ugly downside of the markets.
Too Much in Cash Can Dampen Long-Term Performance
Though it might be tempting to keep a large stash of cash to tap for income when the market flounders, in most cases, I don’t recommend it. Keeping too much money in cash can be a drag on long-term performance, and it could result in you slowly going broke.
Keep in mind that your retirement income plan also should be structured in a way that helps minimize the bite inflation and taxes can take.
Did I mention that creating a retirement income plan can be daunting?
If you aren’t sure where to start — or if you’re worried you won’t have enough to get across the finish line — don’t hesitate to ask for assistance. Winging it is not the answer. A retirement professional can help you understand what you’ll need and how to build a paycheck you can rely on.
Kim Franke-Folstad contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor.
Insurance products are offered through the insurance business Hill Wealth Management dba: Freedom Financial Group. Hill Wealth Management dba: Freedom Financial Group is also an Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. AEWM does not offer insurance products. The insurance products offered by Hill Wealth Management dba: Freedom Financial Group. are not subject to Investment Advisor requirements. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Our firm is not affiliated with or endorsed by the U.S. Government or any governmental agency. Investing involves risk, including the potential loss of principle. 1549011 – 11/22
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
-
Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs InSome brokerage firms are promoting 'event contracts,' which are essentially yes-or-no wagers, blurring the lines between investing and gambling.
