“Retirees face a tough decision-making process when it comes to their financial assets, and they may have to take more risk than they were expecting.”
There are a LOT of moving parts when it comes to transitioning into retirement. That includes plenty of key decisions—many of which don’t have easy answers. Kiplinger’s June article, “How to Generate Income in Retirement” says one of the most critical issues in transitioning to retirement is income planning. You’ll need to balance investment risk, longevity, and your lifestyle, which is not so simple.
Having a budget in place is the foundation of retirement planning. Start by determining your expenses, and then make some modifications by considering these retirement-specific issues:
- Lifestyle plans. Will you travel extensively or settle down in a less expensive community?
- Life expectancy. Today, the average 65-year-old will live almost 20 years, but that’s an average.
- Health care. There’s more to it than just paying Medicare premiums. Don’t forget about long-term care, prescription drugs, and other out-of-pocket expenses. These all need to be in your budget.
- You’ll still be filing a return, so plan ahead.
- It will impact your normal, everyday expenses, and your dollar may not stretch as far year after year.
Once you have the estimates based on your own lifestyle costs and what may happen, start strategizing for your income. First, look at your income sources. Most retirees get their incomes from a combination of the following:
- Social Security benefits;
- Employer pension plans or annuities;
- Qualified retirement accounts and other financial investments;
- Income-generating investments like property or a privately held business; and
- A part-time job, if necessary.
Some income sources are static, while others are discretionary. Consider how your “guaranteed” or static income sources relate to your budget. Will it work or will you need to supplement them with money from your investments?
That is the tough question for retirees and their financial assets. You want to generate income for as long as possible, but you also want to know that your savings are secure. To balance these competing priorities, you may need to assume more investment risk than you anticipated.
If your investments are growing at a low but steady rate that keeps up with inflation, you won’t have fluctuating returns, but you’ll be losing money every year with withdrawals. You could outlive your assets. If you assume more investment risk, you’re more likely to achieve higher long-term growth, and you’re less likely to outlive your savings. But that means you also have higher investment account volatility and a greater chance of losing principal in down markets.
The best thing may be a diversified approach that uses investments suited for an individual’s needs. This depends on a number of financial and personal factors, such as the degree to which you’ll need to rely on your investment accounts for income; the stability of your other income sources; and your lifestyle and anticipated longevity.
Reference: Kiplinger (June 2017) “How to Generate Income in Retirement”
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