Three Ways to Create a Stronger Income Plan for Retirement

A large percentage of Americans over 50, forlornly eyeing the balances in their portfolios, are getting worried they don’t have enough money to get them through retirement comfortably — or even get them through it at all, according to an AARP survey.

That’s a legitimate concern, because personal savings play an even greater role in a successful retirement than they once did. A generation or two ago, retirement for many people was nicely balanced on a three-legged stool — a pension, Social Security and savings.

Not everyone had a pension, of course, but for those who did, those monthly checks provided a solid boost to their finances and gave them more confidence that they could navigate their golden years without running aground.

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Unfortunately, that retirement model has gone wobbly. Pensions have been disappearing for a while, and Social Security is a bit shaky, with benefit cuts becoming a possibility sometime in the not-so-distant future, if Congress doesn’t find a way to avoid a funding shortfall.

That means personal savings — an IRA, a 401(k) or some other type of account or investment — must pull more than its share of the weight. Around age 65, we all begin a race to see which will last longer — our money or our lives.

How to take action if you think you’ll fall short

Instead of despairing, it’s important to take action. The problem is clear: Do you have enough money? How can you create for yourself — and your spouse — regular income designed to last, not just a few years, but a few decades?

You’ve climbed to the summit of retirement after a lifetime of hard work while, hopefully, setting aside as much money as possible to pay for the years ahead. But the descent from that summit can be treacherous if you aren’t careful. Taxes, inflation, health expenses and other factors can cause your money to evaporate quickly if you don’t have a good plan in place.

With that in mind, here are a few retirement income strategies that can increase the odds you won’t run out of money:

1. Following the 4% rule.

Essentially, the 4% rule is a budgeting tool. The idea is, in your first year of retirement, you will draw no more than 4% from your retirement accounts. In each of the ensuing years, you will withdraw 4% plus enough extra to cover inflation.

As an example, if you had $1 million in retirement savings, the most you should withdraw that first year is $40,000. The goal is to provide yourself with a steady income while still maintaining a healthy account balance to preserve your money for the rest of your life.

One caveat to consider: If your money is in just a brokerage account and the market drops 20%, then when you withdraw your 4%, your account balance will be down a total of 24%. That would be difficult to recover from, so diversification is important to try to avoid significant losses that would undermine your goal of making that money last.

Also, while the 4% rule is a good guideline, it should not be a hard-and-fast rule. Individual needs and situations will vary. For some people, 4% may not be enough to provide the money they need to fund their lifestyle, so they might up that to 4.5%. For others, 4% might be more than they need — or more than their account can bear — so they could dial it back to 3.5%.

2. Creating joint income for life.

Here’s a way to create your own version of a pension that will provide income as long as you need it. Purchase an annuity and add an income rider to it, designating that the income be paid out for the duration of both your and your spouse’s lives.

Before you start taking the income, the annuity will grow based on a fixed rate, a variable rate or a combination of those.

At some point, you will activate the rider, and the annuity will begin paying a fixed amount that is guaranteed for life. If either spouse dies, the other spouse continues to receive the income.

3. Building a bond portfolio.

A diversified bond portfolio — with a mixture of government bonds, corporate bonds or municipal bonds — is another way to generate retirement income. Bonds pay interest, usually twice a year, so with a good mix of bonds, you can create income payments that arrive every six months. One key factor to be aware of: Interest rates have been high lately, and bonds are interest-rate sensitive. When interest rates go up, bond values go down.

Ultimately, there is no silver bullet for creating an income plan in retirement. But these strategies can offer a good foundation, especially when working in conjunction with one another.

So much of this, though, comes down to what is right for you. A financial professional can help guide you on whether these strategies — or something else — will give you the income you need so you can enjoy your retirement to the fullest.

Ronnie Blair 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.

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