We’ve spent our whole lives working, spending the money we earn and hopefully saving a little too.
When we retire, everything we have ever experienced about managing our own finances gets turned upside down. We no longer earn as much or any money from work.
We have to figure out how to make do with and maximize what we already have. Instead of saving as much as possible, the new objective is retirement income planning — creating predictable retirement income out of what we have.
It is like we have been playing one game for the last 40 or 50 years and when we retire, ALL the rules change.
To help you learn how to play this new retirement income planning game, we polled retirement experts. Here are 12 practical strategies, rules and tips…
1. Retirement Income Planning: Create Buckets
One of the most popular strategies for retirement income planning is to formulate a bucket approach. A bucket approach establishes different “buckets” or accounts for different types of spending.
“We recommend the “bucket approach,” says Kathleen Fish, founder of Fish and Associates, a financial services firm based in Memphis, Tennessee. “There, we look at all income sources and put our clients’ investments into buckets representing different risk levels.”
- Two to five years of income would be in cash or cash equivalents.
- While a second bucket might be 20-50 percent equity and be in an income bucket for income in years five through ten.
- Bucket three can be more heavily invested in stocks as the retiree won’t have to touch that bucket for at least 10 years.
Fish continues, “This strategy helps to keep people invested, because they can see their required income is set aside and is not impacted by the fluctuations in the stock market.”
2. Separate Needs and Wants
Fish then advises another step in creating lifetime income in retirement – separating one’s “needs” versus one’s “wants.”
“We simply figure out the basic needs or the must haves, and calculate how much is needed on a monthly basis,” she offers.
“We calculate the monthly need and back out what is provided by social security and pension, if applicable. We may utilize a fixed or variable annuity to get to the needed lifetime income, and then use a total return strategy to determine the discretionary expenses, or the want to haves this could be a four to five percent withdrawal off of principal and is looked at annually to determine the proper amount to take off.”
“That money is moved to cash, so the money for the next year is there to spend and not subject to market fluctuations”, Fish says. “If we have a bad year in the market, the discretionary expenses can be adjusted.”
Of course, it is important to remember that your needs and wants will evolve throughout your retirement. Explore the different phases of retirement and how they impact your spending.
Interested in this strategy? Try it out — or any of these ideas — in the NewRetirement retirement planning calculator.
3. Build “Guard Rails”
Paul Ruedi, president of Ruedi Wealth Management, Inc., in Champaign, Illinois, has been running retirement planning simulation models for 20 years. What retirement income strategies does he think work best for retirees?
The best withdrawal strategy is a flexible strategy, and one that is built with “guardrails”, he says.
“Start out with a balanced portfolio (60/40) with an initial withdrawal rate of around 5 percent,” he explains.
“Then, each year, draw down your portfolio by a figure close to the current inflation rate if you had a positive return for the prior year. Each year, calculate your withdrawal rate (how much you are planning to withdraw by the current balance).”
- “If that figure is more than 20 percent higher than your initial rate (5 percent in this case), then reduce your withdrawal by 10 percent,” Ruedi advises. “For example, if you start at 5 percent, once the withdrawal rate is above 6 percent, reduce spending by 10 percent,” he says.
- “Correspondingly, if your withdrawal rate is 20 percent lower than your initial rate of 5 percent, increase spending from your portfolio by 10 percent,” concludes Ruedi.
“It sounds complicated, but this system is very easy to calculate and understand,” he says. “It will allow you to begin with a higher withdrawal than the 4 percent rule. Better yet, it provides guardrails, which most people have no idea how to create.”
4. Go the Annuity Route to Avoid Unpredictability
“Outside of a lifetime annuity (which eliminates flexibility), most retirement income plans are unpredictable,” says Hank Brock, a certified financial planner at Brock and Associates, in St. George, Utah. “We have found that a large segment of retirees are seeking certainty. They worry about what might happen if they live too long, if financial markets collapse (thus killing any 4 percent draw down plan), if interest rates go up or down, or if dividends get cut.”
“If you are concerned about unpredictability, then a lifetime annuity with inflation protection and spousal support is the way to go,” says Brock.
And, you can now get pretty sophisticated with annuities. “In years past, the alternative to riding out a bumpy stock market while trying to create a steady retirement income was to take the money out of the market and put it into an immediate annuity,” notes Sean Clark, principal with York Independents, in York, Pennsylvania.
Clarke says there is a different method available for middle class investors today, and is a solution that he uses with great frequency. “The solution is an equity indexed annuity with a lifetime income benefit rider,” he explains.
“This account functions similarly to any other type of investment or deposit account, in which the investor retains full control over the investment, but it also provides for an income guaranteed by the annuity company to last at least as long as the client does. This eliminates longevity risk for the client, and creates a level of confidence in their ability to retire which is unavailable in mostly any other investment.”
With the proper education, most investors find this option easy to understand, and “consider it to be a no brainer,” he adds. “Proper use of the index annuity represents the best modern theory of retirement income creation.”
5. Assess Risk Tolerance and Needs
To achieve a retirement income plan with certainty without purchasing an annuity, you might want to discuss your needs with a trusted financial advisor.
“Have your financial advisor create a draw down strategy specific for your own particular risk tolerance and needs,” advises Timothy Shanahan, president and chief strategist at Compass Capital Corporation, in Braintree, Massachusetts.
Tailor your retirement income plans to how much risk you can take and how much income you need.
6. Maximize Social Security
If you wait to start Social Security until your maximum retirement age, then you will have a significantly higher monthly retirement income than if you start at age 62.
Delaying the start of your Social Security is simply one of the best ways to boost your lifetime retirement income.
Use a break even Social Security calculator to help you figure out the optimum time for you to start this benefit.
7. Think Outside the Box
Stocks, bonds, annuities and real estate are not the only ways to generate retirement income from your savings. Many retirees are getting creative and are investing their money in small businesses that can provide a long lasting income.
We have heard of people investing their savings in a small inn in the country and others who have bought a taco shack on the beach. There are lots of opportunities that could throw off just enough income to keep you going.
Best of all, the business will keep you active and engaged as you age.
Of course, these types of ventures can be risky and you should know something about running the type of business you invest in. Also think about your plan if your health deteriorates.
8. Anticipate Spending Shifts
You probably won’t be spending exactly the same amount year after year in retirement. As such your retirement income plan should anticipate those spending shifts.
Numerous studies show that, for most retirees, spending goes through three predictable phases:
- When we first retire, we spend a little more than when we were working
- As we continue to age, we generally start to slow down a bit and our spending slows down as well
- In old age, medical expenses can cause spending to spike.
The NewRetirement retirement planning calculator let’s you customize different spending levels for different phases of your own retirement. This can help you to tailor your retirement income plan to your actual needs.
9. Go Old School
Financial gurus also say there’s nothing quite like the classics when you’re trying to build up, and preserve, income in retirement.
“The reality is that retirement investing should be treated the same as any other kind of investing: your goal is to achieve the highest return with the least risk of loss,” says Lee Tobey, fund manager at Hedgewise, Inc.
“Prioritizing dividends and interest at the expense of total return doesn’t make sense when you look at the facts,” he says.
Tobey continues, “The best strategy is to prioritize diversification and risk management above all. You want a mix of assets in your portfolio that can weather any economic environment while still generating expected returns of 5 percent or above. If you run an analysis on the last 70 years or so, this mix is:
- 60 percent government bonds
- 30 percent equities
- 5 percent in real estate
- 5 percent in gold.
There is literally no other mix of assets that has performed better on a risk adjusted basis.”
10. Consider Home Equity
Your home is likely your most valuable asset, not your retirement savings.
And, there are actually numerous ways to turn your home equity into retirement income.
- If you get a reverse mortgage, then you can actually take your money in the form of a lifetime annuity or secure a line of credit. So, you get to stay in your home for as long as you life, but the home also provides a reliable income stream. A reverse mortgage isn’t for everyone – check if it’s suitable first.
- You can downsize, cash out some of your home equity and utilize some of the retirement income strategies in this article to create predictable income.
- It might even be possible for you to rent out part of your home and generate income that way.
11. Be Tax Efficient with Withdrawals
Every penny counts when managing money in retirement and that is especially true when it comes to tax savings.
Every retirement account you have may be taxed differently and you will want to be strategic with how and when you take withdrawals from each bucket. A few tips to consider:
- Prioritize withdrawals for your required minimum distributions — mandatory withdrawals that start at age 70 1/2.
- Consider a Roth conversion to spread out when and how much you are taxed.
- Be aware of how much you withdraw each year and how the amount impacts your tax bracket.
Taxes are really complicated and what is best for you is different from what is best for anyone else.
Tax efficiency is one compelling reason why you might want to work with a good financial advisor for retirement. You will want to look for someone with experience specific to income taxes as well as someone familiar with retirement drawdown strategies. (Many financial advisors are well versed in helping clients save money but have less experience with managing and drawing it down in retirement.)
12. Retirement Income Planning: Get a Real Plan and Keep it Updated
One of the best — and easiest — steps you can take to figuring out retirement income is to create a detailed retirement plan. You need to really dig into the details of your own financial situation and see how well that mixes with your hopes for the future.
- Start by assessing what you have
- Figure out exactly what you need and would like to spend
- Look at the details that might sabotage your finances
- Create a retirement income plan tailored to meet the demands you yourself will face in the future
You probably have significant retirement income from Social Security. The trick is to calculate out how much more you might be spending every month and figuring out a reliable income plan for that difference.
A simple five question retirement calculator won’t do this for you, but there are some sophisticated tools available online.
The NewRetirement retirement planning calculator is widely considered the best free online tool. It is highly detailed and easy to use, best of all it saves your information so you can quickly make adjustments as your finances and plans evolve.
And, once you have set up a baseline plan you can try any of the scenarios described above and assess whether or not it’s really a good idea for your future.
Ready to create your detailed retirement plan?
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