Managing Retirement Income

Whatever your hopes and dreams for retirement, the reality is the income that replaces your wages will prove to be the key to attaining the quality of life in retirement you envision. Social Security is a start. A 401(k) plan or pension from your company retirement plan may augment that income.

Managing the income from your investments will require an active role on your part. Below are three key decisions you’ll need to make:

Deciding when to make your moves

Will you be making changes to the kinds of investments you have when you retire? Many people want to increase their share of income-producing investments or seek more security and less risk.

It’s impossible to predict the best time to move from one particular investment class into another (from stocks into bonds, for example). One recommended strategy is to shift investments gradually, perhaps over two to five years. This kind of transitioning reduces the impact of the market and economy at any one time.

Keep in mind, however, that you shouldn’t follow the process too strictly. Taxes and transaction costs also need to be factored into the equation.

Deciding where to withdraw money

Some of your retirement income will be paid regularly and automatically (Social Security benefits, for instance). If you need additional income to meet your expenses, which of your investment should you tap?

From a tax perspective, withdrawing money from an IRA doesn’t make sense if it isn’t necessary. Your investments are earning tax-deferred income and that’s too valuable a benefit to give up, if you don’t have to. (Once you reach age 70 ½, you will, by law, have to begin regularly scheduled withdrawals.)

Instead, many financial professionals suggest setting up a spending account. A spending account is made up of liquid assets like a money market fund. The account will provide a source of additional income to meet your regular expenses when other sources are insufficient. The rule of thumb is to keep enough cash in the account to meet one year’s expenses.

Of course, the amount in the fund will fluctuate as you make withdrawals and additions to the account.

Deciding your withdrawal rate

How much can you safely withdraw from your retirement money each year and make sure enough remains available to last for the rest of your life?

There is no shortage of opinions and studies on the subject! During the bull market years of the 1990s, some retirement planners suggested you could withdraw 5% to 6% a year without eating into your principal. One study published last year in a financial planning journal kept to that number. Others are putting the rate at a more conservative 3% to 4% range which with we agree.

However, more figures than a simple percentage will enter into your decision. The amount you have accumulated, the expenses associated with your retirement activities, expected life span, and your feelings about how much you want to leave to your heirs also may influence your decision.

To find out more, please contact us.