Creating a Steady Income Stream In Retirement

Creating a Steady Income Stream In Retirement

Save. Save more. Save even more. Eventually, those words will change.

It’s time to retire, and start spending instead of saving, but some retirees still feel uncomfortable with the transition from accumulation to distribution of financial resources. Some are not confident that they’ve saved enough. In fact, in some studies failing to save enough is the number one retiree regret, and the number one worry is running out of money.

For many, these concerns are well-founded because retirement costs (especially healthcare) can be volatile and difficult to assess ahead of time. When a family starts to live on their investments, they want income today, but they also want to be assured of adequate income tomorrow. They don’t become less eager to obtain a good return on their money, but need to start worrying almost as much about the preservation of their portfolio.

Those fears can often be allayed by realizing what we really have control over.

  • When it comes to retirement, we can choose how much to save, and how to invest those savings.
  • We can choose the retirement start date.
  • We can choose whether to keep working in retirement, and there may be some discretion in our spending.
  • We can’t control the economic environment that will exist at retirement.

Those who are planning to retire in the near term know all too well how financial market reversals can sabotage even the best of plans. The recent volatility is enough to make anyone’s head spin.

Four steps to begin your retirement income planning:

Step 1 – Review all income sources. Inventory all the predictable income streams that you expect to receive—Social Security, traditional pension, lifetime annuities, rent from real estate, and portfolio income. Compile a list of all financial and real assets, including stocks, bonds, mutual funds, certificates of deposit, IRAs, 401(k) accounts and real property.

Step 2 – Project your expenses. Estimate your monthly and annual expenses in retirement. Divide the expenses into the essentials—food, clothing, housing, transportation, insurance and taxes—and the discretionary—travel, entertainment, gifts. Remember that retirement expenses likely aren’t going to be uniform either. For most people, travel expenses will be much higher in early retirement as places are crossed off the bucket list, and conversely healthcare expenses grow as we age.

Step 3 – Compare income to essential expenses. This will reveal whether there will be an income gap that will have to be filled by touching principal. Identify assets for essential and discretionary expenses. If you have a gap for meeting essential expenses, you may want to segregate the assets that will be liquidated as needed to fill the hole. Some parts of the portfolio may have tax advantages that you want to exploit for as long as possible. Once the essentials are funded fully, remaining assets may be tapped for the discretionary expenses.

Step 4 – Monitor the plan annually. Each year you should review your plan with your financial professional, making adjustments as needed, as your retirement circumstances change.

What should retirees put more focus on when it comes to investments?

Focus on total return, not yield. It’s common to focus more on income when we’re not getting a steady paycheck, but one should consider their expectable total return—that is, current income plus capital gains or minus capital losses. For example, when “high-yield” bonds are paying much more than Treasury bonds, some of that extra yield is intended to compensate investors for potential problems or defaults, especially in case of an economic downturn. Going for maximum yield today must be balanced against the need for capital tomorrow.

Inflation will destroy purchasing power in the background. It’s important to realize that retirement is long and even in small doses (unlike the last couple years) inflation adds up—more capital is needed to deliver a given level of purchasing power. That’s why it’s important to consider reinvesting the returns or part of the returns of stocks or bonds to keep up with inflation.

Diversify. Don’t keep all your eggs in one basket. Spreading risk is a fundamental way to reduce risk overall. To diversify adequately, an investor should allocate money among various asset classes. The most basic asset classes are stocks, fixed-income investments such as bonds, and cash reserves. You also need to diversify within asset classes.

Look at the big picture. To control risk through strategic diversification, investors should not look just at their personal portfolios or just at their IRAs/401(k). It’s the total financial picture that matters. Own a $500,000 stake in a closely held business? Think of that stake as the equivalent of $500,000 in small-cap stocks (though less easy to liquidate). Receiving $50,000 a year from your former employer’s tax-deferred pension plan? Social Security income should be part of the picture too, as that’s part of the income creating portfolio. If you are going to receive $40,000 a year from social security, that’s like having a $1,000,000 bond portfolio paying 4% indexed for inflation. Going through the whole picture can help ensure that you are taking on the amount of risk you are comfortable with.

Consider Garden State Trust Company for a consultation

If you’re considering retiring soon or even just having a work-optional lifestyle but are concerned about whether or not you have enough assets to do so, consider a consultation with one of our professionals.

We help our clients take sensible steps to deal with the underlying conflict—between the desire for decent returns and the need to conserve capital and keep up with inflation. We also understand the underlying tax planning that can help create tax efficiencies in a portfolio. The goal isn’t to avoid paying taxes, but rather to have more after paying them.

We will be pleased to help you on the road to financial independence.