Turning savings into a paycheck
You'll most likely spend your pre-retirement years accumulating assets through saving and investing. Once you hit retirement, the idea is to use these assets in a way that will provide you with a cash flow that will try to match your spending.
Having assets during retirement is a great thing, but it you can't effectively draw on your wealth to satisfy your spending in retirement, it won't adequately serve your retirement needs.
Download PDFPicture this: You've worked hard your entire life, saving diligently for retirement. At age 65, you were living the dream. At age 75, you enjoyed a comfortable, if not luxurious, lifestyle. But at age 85, you inexplicably have run out of money.
How did the ship sink so quickly? There was an iceberg, barely visible above the water but monstrous beneath the surface – the result of mismanaged distributions, losses in the markets, low interest rates and ill-conceived budgeting. It probably doesn't make you feel better, but you're probably not alone in having hit that iceberg.
A nationwide survey of 1,000 adults, released last month from TIAA-CREF, shows that although a majority of Americans understand the importance of receiving guaranteed monthly income in retirement, 38 percent, have analyzed how their savings would translate into a regular "paycheck" in their golden years. Without a distribution plan that provides you with consistent income for as long as you need it, you run the risk of spending too much too soon and living out the rest of your life in the poor house – or worse, your children's house.
You only get one shot at retirement, and you need to get it right. Consider the following tips for getting the most out of your retirement savings:
Stay invested as a retiree.
A traditional investing rule has been to subtract your age from 100 and use the result as the percentage that stocks should represent in your portfolio. This means that as you approach retirement, you’ll move away from equities and start investing more in bonds, so as to lessen your overall risk. But increasing lifespans mean some of us could spend more than 35 years in retirement, and going too conservative means older investors may outlive their savings.
A more recent guideline is to subtract your age from 110 or 120, but that still may not be appropriate for everyone. The bottom line is if you need to make your money last longer, you’ll need the extra growth potential that continuing to invest in a mix of stocks and bonds can provide. Although that may seem to contradict the apparent logic of not taking risks with your money once you hit a certain age, relying on certificates of deposit, money-market accounts and cash could be far riskier, and may mean your retirement income won’t keep pace with inflation.
Watch your spending.
For a realistic picture of what you’re able to pay out in your golden years, you need to create a retirement spending budget long before you actually stop working. Creating that budget is a necessity to help you avoid draining your nest egg. Your discretionary spending is one of the biggest factors impacting your retirement income, and it’s all in your hands.
A retirement budget should include needs (rent, food, utilities), wants (cable, cell phone) and wishes (the fun stuff you want to do in retirement, such as travel, hobbies and entertainment). To cover your bases, make sure also to account for the unexpected, such as a struggling relative in need of financial assistance, repairs and maintenance on the big-ticket items you own and medical care for any furry friends you may have.
Add income-generating investments to your portfolio.
Having a diversified portfolio with positions in a variety of asset classes is a key investing strategy designed to help smooth out the ups and downs of the markets. That being said, you should always invest according to your specific, individual goals. If you’re looking to build a portfolio that will generate cash, and are more concerned with having enough income than you are with building wealth, you may want to consider adding more fixed-income products such as Fixed or Fixed Indexed Annuities.
Whether you’re finally in countdown mode or still have 20 years until you retire, you deserve to look ahead to retirement, knowing you’ll have the income you need to afford the lifestyle you want. Running out of money is one of the biggest retirement fears, but with a little advance planning, you can develop a strategy to help your hard-earned dollars last a lifetime.
Want a strategy built around your income?
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