Retirement Income Methods

    For some investors it’s like the baseball player who can hit but  can’t field or throw. There are investors who can accumulate money in a retirement plan but haven’t a clue how to get a steady stream of income from their savings when they stop working. 

Income plan and design is as important, if not more so, than the accumulation of retirement assets. When investors are planning income their saving days are at an end. There are no second chances to return to the proverbial work well and start over in case a mistake is made in plan design and implementation.

Setting the wrong plan and income design and retirees may well find themselves running out of money well before they run out of life.

There are five methods for income withdrawal. Depending on the investment portfolio, personal risk level and the amount/percentage of withdrawal a retiree may use one or a combination of the following.

Cash

Uncertain on the retirement plan future account value? Moving a year or two of income into the cash or money market fund sector will provide worry-free monthly income. Sometimes you hear sales people refer to moving buckets of liquid assets to money market or savings. This is what they’re talking about. Cash investors will get a smooth ride, have money for emergencies and worry about the bulk of their invested portfolio down the road.

Interest

Individual Bonds and bond mutual funds (both open and closed) and exchange traded bond funds pay interest which can be reinvested or paid in cash. Using bond interest as income is as old a method as there is. In fact there are more bond investors than equity. Laddering of individual bonds (with varying maturity rates) to create a portfolio that constantly takes advantage of current interest rates is the key to buying bonds and building a sustainable income plan.

Dividends and/or Capital Gains

Stock investors may not get the highest percentage of income from their portfolio but they may own companies that should have a history of providing continuous and increasing income in the form of dividends. Those investor who own mutual funds and Exchange Traded Funds may also create portfolios that provide income through dividends and the annual payment of capital gain distribution.

Systematic Withdrawal

Mutual fund companies created the systematic withdrawal income plan. Simplicity is key for the retiree to receive monthly/quarterly income by having the fund company redeem shares in a percentage that exactly matches the amount or percentage needed. Dividends and capital gains are reinvested and fund shares are sold (without charge) to the third decimal. Retirees are able to request and receive the highest income stream from this method.

Annuitization

Buying an annuity for income is still a smart thing to do if the insurance company is fiscally sound.  Generally fixed annuity incomes should not be purchased when interest rates are at all time lows. Annuity income is based on interest rates, the annuity option and retiree age. There are a variety of confusing income options available and the annuitant would be smart to have someone who knows how those options work explain them in detail. It is all too easy to make a mistake and choose an income option that disinherits a spouse or significantly reduced benefits.

While I have made the income withdrawal plans sound simple they are extremely complex to implement. Retirees would be wise to make sure they review and update their income plans and investments every six months to ensure that they are on the right track.

Finally, there is a reason why some men wear both a belt and suspenders, they really are afraid their pants will fall down. Use the same reasoning in income plan design. There is no reason why retirees cannot use several  of the above methods to ensure successful continuous lifetime income.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.