Dealing with clients and prospective clients each week: one of the most asked questions we get is “How do I generate income in retirement from my savings?”
The reason we get this question is that previous generations lived differently when it came to planning for retirement. They worked for 30 years before retirement, and they knew how much their monthly pension check would be for the rest of their lives. Plus, they counted on social security.
It’s a far different story today. The percentage of employers who still offer a traditional defined benefit plan to new employees fell to 5 percent in 2016, down from 50 percent in 1998, according to a 2017 report from Towers Watson. The trend has changed and now most companies offer a defined contribution plan, also called a 401(k) plan.
Now it is up to the employee to control the investment elections, savings rate, and distribution strategy. Once someone nears retirement, the distribution strategy becomes the focus.
SO HOW DO YOU GENERATE INCOME IN RETIREMENT? Wish there was a simple and quick answer to this question, but there is not. Here are a couple steps
- Let’s start by estimating monthly and annual expenses and creating a budget for the golden years. This should include all essential (food, housing) and discretionary (travel, entertainment) expenses.
- Determine what reliable sources of income are available. For most, social security will be the biggest part of the retirement income strategy – this requires a strategy in regards to when you claim it. Do you have a pension or annuity that provides income for life?
Answering 1 and 2 will tell us how much income must come from your retirement savings.
Here are different ways to generate income from your retirement savings:
- Dividends and Interest – withdrawing the dividends and interest that are generated from the investments
- Selling investments – Using some principal to withdraw as retirement income
- Buying an annuity – buy an income stream for life
- Bond ladder – use maturing bonds as an income source
- Cash withdraws from life insurance – some cash value life insurance products offer the ability to take loans or withdraw the principal.
What is the best strategy for you? That depends… Start by working through your retirement budget and income sources. Then, spend time researching the above strategies to see which will help meet your retirement income goals. This is where a qualified financial adviser can really be of assistance.
Make sure to take the above quiz and see how you do!