Are you ready to transition from your working years into retirement but don’t know how? After receiving a steady paycheck for so many years, many clients don’t know how to plan for and transition into retirement. Now that the time has arrived, what are some of the best ways to make sure you have enough money for the kind of life you plan to have during retirement? Let’s explore a diversified income stream approach and examine how each income stream works individually and together to satisfy your retirement income needs.
Checking and Savings Accounts
The first stream comes from your checking and savings accounts. In the United States, the current yield on a high-yield savings account is around 1%. This income stream will need to cover six to 12 months of expenses to cover your daily liquidity needs. With interest rates on these accounts at historic lows, you will need to generate income from other sources to fully fund your retirement needs. (For more from this author, see: Important Steps to Take for Your Retirement Plans.)
Investment Portfolio Dividends
The second stream consists of income and dividends being generated by your investment portfolio. This could consist of dividends generated from stocks, bonds, real estate or any other means of income generation you may have. However, this should not be a fixed portfolio through the length of your retirement, your investment strategy may need to change with the state of the markets through your retirement years. This income should be fairly predictable, and will be funneled directly into your checking and savings accounts (your first income stream). This stream is less liquid and allows your assets to grow and keep pace with inflation, which guards against diminishing purchasing power in the future.
Upon retirement, depending on your unique situation, you should plan to start taking strategic, tax sensitive withdrawals of about 2-4% per year, based on your spending needs. In my experience, it is best to establish a systematic withdrawal strategy and stick to it. Creating a plan can help prevent you from overspending and depleting investment assets at an unsustainable rate. The goal is to plan for and maintain a comfortable income for each year of your retirement. (For related reading, see: Managing Retirement Account Withdrawals.)
Guaranteed Lifetime Income
The final stream is guaranteed lifetime income. The income generated from this will feed right back into the first stream. Guaranteed income includes receiving a company pension, purchasing an annuity from an insurance company and taking income, and drawing from Social Security. This income will be very predictable and guaranteed for life. When deciding whether to take the company pension or lump sum, I would recommend talking to a financial professional. There are often many different options to choose from and the elections are generally irreversible, so you’ll want to initially make the best, most informed decision. If you can afford to, postponing Social Security benefits until age 70 can significantly grow your retirement income. Your credit increases by 8% each year you delay taking the benefits.
In summary, the main streams of income for managing expenses are cash held in a bank in checking or savings accounts, dividends and income generation from an investment portfolio, and guaranteed income sources such as pensions, annuities and Social Security. When planned correctly and strategically, a diversified income stream approach can simplify retirement by creating a managed, methodical system.
(For more from this author, see: Finding Your Perfect Place to Retire.)
David Chazin is a registered representative of Lincoln Financial Advisors. Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln Marketing and Insurance Agency, LLC and Lincoln Associates Insurance Agency, Inc. and other fine companies. Insight Wealth Strategies is not an affiliate of Lincoln Financial Advisors Corp. Lincoln Financial Advisors does not provide legal or tax advice. 3000 Executive Parkway, Ste 400. San Ramon, CA 94583. (925) 659-0217. CRN1745646-032717