Let’s talk about something of major importance as you begin to prepare for retirement: learning how to turn retirement assets into income. After spending years working to accumulate assets and focusing specifically on investment returns, retirees will need to shift their focus to turning assets into a predictable stream of income throughout their retirement. But how does one do that? Consider the following tips when planning for your retirement:
Income Streams
There are three main income streams to pull from during retirement, and your goal should be to employ a diversified income stream approach to meet your retirement need. First, you should rely on your checking and savings accounts, which should cover 6 to 12 months of expenses, but these accounts offer a very low rate of return, making other streams of income necessary. A second income stream should include income and dividends from investments, including stocks, bonds, real estate and any other assets. This stream should be fairly predictable, and you should pull from it predictably as well to maintain the income stream. Finally, you may rely upon a guaranteed lifetime income stream, such as income from a pension, annuity, or Social Security.
Prioritize Withdrawals
You should first consider the order for withdrawal from your asset accounts. Generally, plan to pull from taxable accounts first. Taxable accounts may include brokerage accounts, inherited investment portfolios, and any other account for which you pay taxes. Avoid pulling from your tax-deferred accounts as long as possible so they can continue to compound interest without tax penalty.
Set a methodical rate for withdrawal. Generally, a conservative distribution rate of about 4 percent per year is appropriate, adjusted for inflation. That rate, however, may fluctuate from year to year, but a withdrawal rate of between 3 and 7 percent is generally recommended by financial planners.
Automate Payouts
If available, you should definitely take advantage of automated retirement payments, which are available for some types of investment funds. The automated payout is a managed fund designed to balance the principal growth with payout rate in order to retain your savings as long as possible.
Protect Against Uncertainty
If you are concerned about risk and financial uncertainty, an annuity may be a good option for you to consider for managing your funds. An annuity, be it an immediate or income annuity, is a type of insurance that you can invest in by providing a lump sum of money in exchange for a guaranteed income for life. This is a great option for those who anticipate a longer retirement timeframe (30-40 years) and for those who may not have guaranteed streams of income.
Retirement planning is an important albeit complicated and emotionally involved process. To ensure a steady and predictable means of income, you should carefully plan for withdrawal and payouts from your retirement assets. You should definitely consider consulting with a financial planner to help you determine your risk tolerance and the importance you place on income security and stability.
As your friendly financial planner and tax expert, we’re here to help.
