How to Generate Income While RetiredSubmitted by Butera Wealth Management, LLC on June 7th, 2016
There is a retirement crisis silently occurring in the United States in the modern era. While the economy shows signs of growth and steady improvement, many are losing sight of the goal of saving for retirement. In fact, Time notes that 1 in 3 Americans have saved nothing for retirement as of March 2016.
Even individuals who have started a retirement fund do not always end up saving enough, often because of misguided investment approaches. For example, those with a history of conservative investments, producing little to no returns, need to think differently when retired. These individuals need to find a way to generate income while retired.
What to Avoid
Above all else, it is important not to panic or act aggressively. If you act aggressively by taking more risk with your investments over time, you could experience more volatility during retirement that could be devastating.
Where to Start
The best approach to generating income during retirement depends on a number of factors. This includes, but it is not limited to: how much you have saved to date, how much income you will need in retirement, and how long you have to achieve that financial benchmark.
Interest and Dividends
If you want to seek a safe approach to generating income during retirement, you may want to consider spending only your interest and dividend payments. This is a simple approach that keeps your retirement savings intact. It will not provide you with a great deal of annual income during retirement, but it may offer a good chance of your income lasting throughout your retirement.
In order to follow this approach, you will need a substantial portfolio to begin with. Also, consider investing your savings in bonds and other fixed income investments designed to generate income for you. If you have a goal of the funds lasting longer, invest a portion in stock investments that have the potential to counteract inflation. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Another possible approach to increasing your retirement income is to draw your annual income from a combination of interest and dividends, as well as minimal withdrawals of principal funds. You can invest according to an asset allocation plan that reflects your time horizon during retirement, your comfort with various levels of risk, and need for income.
This is best used by withdrawing interest, dividends, and proceeds (if any) from selling other investments at a set rate. An example of this could be taking 4% of your portfolio's value each year for income. The withdrawals could be increased as needed to keep pace with inflation.
Asset allocation does not ensure a profit or protect against a loss.
Total Return with Annuity
Additionally, you can attempt to supplement interest and dividend income, and principal withdrawals, with the guaranteed income of a fixed annuity. This requires using a portion of savings to purchase an annuity that pays a guaranteed stream of income for a predetermined period of time, or for life. This could be helpful with your basic expenses. The balance of your money could be invested in more growth oriented assets that may have a better chance to keep pace with the cost of living.
Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.
Whatever approach you take, it is important to consult your financial advisor to determine the risks and potential rewards of doing so. No one approach is right for everyone, and your needs might change during retirement, forcing you to adopt a new approach to generating income during retirement.
Consult Louis J. Butera, CFP®, today for further information.