Retirement Income Strategies: 18 Ideas for Lifetime Wealth and Peace of Mind

We’ve spent our whole lives working, spending the money we earn and hopefully saving a little too. When we retire, everything we have ever experienced about managing our own finances gets turned upside down. We no longer earn as much or any money from work. We have to figure out how to make do with and maximize what we already have. Instead of saving as much as possible, the new objectives include developing retirement income strategies — creating predictable retirement income out of what we have.

retirement income strategies
Smile! Choose the right retirement income strategy and have fun with retirement!

It is like we have been playing one game for the last 40 or 50 years and when we retire, ALL the rules change. To help you learn how to play this new retirement income strategies game, we polled retirement experts.

Here are 18 practical plans, rules, and tips…

1. Retirement Income Strategy: Create Buckets

One of the most popular strategies for retirement income planning is to formulate a bucket approach. A bucket approach, also sometimes called a “time segmentation strategy,” establishes different “buckets” or accounts for different spending in different time periods.

Money you need in the short term would be held in cash. Money you need a long time from now could be invested in higher risk, higher return opportunities.

For example,

  • Near Term Monetary Needs: Two to five years of income would be in cash or cash equivalents.
  • Mid Term Income: Your second bucket might have a more mixed investment allocation in things like bonds and CDs or mutual funds. These types of investments can provide some growth.
  • Long Term: Bucket three can be more heavily invested in funds and stocks as the retiree won’t have to touch that bucket for at least 10 years.

“We recommend the “bucket approach,” says Kathleen Fish, founder of Fish and Associates, a financial services firm based in Memphis, Tennessee. “There, we look at all income sources and put our clients’ investments into buckets representing different risk levels.”

Fish continues, “This strategy helps to keep people invested, because they can see their required income is set aside and is not impacted by the fluctuations in the stock market.”

Is a Retirement Bucket Strategy Right for You?

2. Separate Needs and Wants

Fish then advises another step in creating lifetime income in retirement – separating one’s “needs” versus one’s “wants.” This type of retirement income strategy is also called a “Flooring Retirement Income Strategy” or “essential vs discretionary.”

Your income for your retirement spending needs should come from a secure income source. While money earmarked for your wants can have more risk associated with it.

“We simply figure out the basic needs or the must haves, and calculate how much is needed on a monthly basis,” Fish offers.

“We calculate the monthly need and back out what is provided by social security and pension, if applicable. We may utilize a fixed or variable annuity to get to the needed lifetime income, and then use a total return strategy to determine the discretionary expenses, or the want to haves this could be a four to five percent withdrawal off of principal and is looked at annually to determine the proper amount to take off.”

“That money is moved to cash, so the money for the next year is there to spend and not subject to market fluctuations”, Fish says. “If we have a bad year in the market, the discretionary expenses can be adjusted.”

Of course, it is important to remember that your needs and wants will evolve throughout your retirement. Explore the different phases of retirement and how they impact your spending.

Interested in this strategy? Try it out — or any of these ideas — in the NewRetirement Planner. This detailed planning system enables you to create a detailed budget for the rest of your life. And, you can differentiate what you want to spend vs. what you need to spend in nearly 100 different categories. You can even specify how your spending will change over time.

3. Systemic Withdrawals / Fixed Percentage Withdrawals

This is probably the most well-known retirement income strategy. You take your investment portfolio and sell off a fixed withdrawal amount each year to generate retirement income.

While this is a popular strategy, it is falling out of favor – particularly the recommendation to take 4% each year.

According to many investment professionals, withdrawing from your nest egg at a rate of 4% is one way to hopefully ensure that you will still have money at your death. But, it’s not a hard and fast rule. Some argue that 4% is too much, some say it’s too little.

And you know what? They’re both right because everyone has different circumstances and therefore, a different scenario and no one can predict what the stock market will do.

The NewRetirement Planner allows you to play around with different fixed percentage withdrawal rates. You can specify any annual fixed percentage and the system models this value and you can see if it is in excess or below all other withdrawals (RMDs, one time expenditures and all other spending needs).

4. Build “Guard Rails”

Paul Ruedi, president of Ruedi Wealth Management, Inc., in Champaign, Illinois, has been running retirement planning simulation models for 20 years. What retirement income strategies does he think work best for retirees? The best withdrawal strategy is a flexible strategy, and one that is built with “guardrails”, he says. “Start out with a balanced portfolio (60/40) with an initial withdrawal rate of around 5 percent,” he explains.

“Then, each year, draw down your portfolio by a figure close to the current inflation rate if you had a positive return for the prior year. Each year, calculate your withdrawal rate (how much you are planning to withdraw by the current balance).”

  • “If that figure is more than 20 percent higher than your initial rate (5 percent in this case), then reduce your withdrawal by 10 percent,” Ruedi advises. “For example, if you start at 5 percent, once the withdrawal rate is above 6 percent, reduce spending by 10 percent,” he says.
  • “Correspondingly, if your withdrawal rate is 20 percent lower than your initial rate of 5 percent, increase spending from your portfolio by 10 percent,” concludes Ruedi.

“It sounds complicated, but this system is very easy to calculate and understand,” he says. “It will allow you to begin with a higher withdrawal than the 4 percent rule. Better yet, it provides guardrails, which most people have no idea how to create.”

5. Go the Annuity Route to Avoid Unpredictability

Most retirement income plans are unpredictable.  You don’t know how long you will live and if the money will last. You don’t know if stocks will go up or down. You can’t be sure if dividends will get cut or if interest rates will go up or down.

Anyway, if you are concerned about unpredictability, then a lifetime annuity with inflation protection and spousal support might be the way to go.

And, you can now get pretty sophisticated with annuities. “In years past, the alternative to riding out a bumpy stock market while trying to create a steady retirement income was to take the money out of the market and put it into an immediate annuity,” notes Sean Clark, principal with York Independents, in York, Pennsylvania.

Clarke says there is a different method available for middle class investors today, and is a solution that he uses with great frequency. “The solution is an equity­ indexed annuity with a lifetime income benefit rider,” he explains.

“This account functions similarly to any other type of investment or deposit account, in which the investor retains full control over the investment, but it also provides for an income guaranteed by the annuity company to last at least as long as the client does. This eliminates longevity risk for the client, and creates a level of confidence in their ability to retire which is unavailable in mostly any other investment.”

With the proper education, most investors find this option easy to understand, and “consider it to be a no­ brainer,” he adds. “Proper use of the index annuity represents the best modern theory of retirement income creation.”

Use an annuity calculator to see how much income you can afford and assess if an annuity is right for you. Better yet, model an annuity as part of your complete retirement plan with the NewRetirement Planner.

6. Assess Risk Tolerance and Needs

To achieve a retirement income plan with certainty without purchasing an annuity, you might want to discuss your needs with a trusted financial advisor.

“Have your financial advisor create a draw­ down strategy specific for your own particular risk tolerance and needs,” advises Timothy Shanahan, president and chief strategist at Compass Capital Corporation, in Braintree, Massachusetts.

Tailor your retirement income plans to how much risk you can take and how much income you need.

Don’t have an advisor? Collaborate with a CERTIFIED FINANCIAL PLANNER™ professional from NewRetirement Advisors to identify and achieve your goals. NewRetirement Advisors offer fiduciary fee-only services starting at $1,500. Book a free discovery session.

7. Maximize Social Security

If you wait to start Social Security until your maximum retirement age, then you will have a significantly higher monthly retirement income than if you start at age 62.

Delaying the start of your Social Security is simply one of the best ways to boost your lifetime retirement income.

Use the Social Security Explorer that is integrated into the NewRetirement Planner to help you figure out the optimum time for you to start this benefit.

8. Think Outside the Box

Stocks, bonds, annuities and real estate are not the only ways to generate retirement income from your savings. Many retirees are getting creative and are investing their money in small businesses that can provide a long-lasting income.

We have heard of people investing their savings in a small inn in the country and others who have bought a taco shack on the beach. There are lots of opportunities that could throw off just enough income to keep you going.

Best of all, the business will keep you active and engaged as you age.

Of course, these types of ventures can be risky and you should know something about running the type of business you invest in. Also think about your plan if your health deteriorates.

Explore Creative Ideas for Passive Income Streams in Retirement.

9. What About a Lockbox Retirement Income Strategy?

William Sharpe is a Nobel Prize winning economist and the professor of finance, emeritus, at Stanford University’s Graduate School of Business. His Nobel was awarded for developing the Capital Asset Pricing Model (CAPM). He is also well known for the Sharpe Ratio, a number designed to summarize the desirability of an overall investment strategy.

However, much of his later work has focused on retirement income. He has recently created a computer program covering no less than 100,000 retirement income scenarios based on different combinations of life spans and investment returns.

The program is available in a free ebook, Retirement Income Scenario Matrices.

Sharpe’s systems are a bit complex. You can get a simple summary of his ideas here: The Lockbox Strategy and 10 Other Retirement Income Concepts from Nobel Laureate, William Sharpe.

10. The Spend Safely in Retirement Strategy

The Stanford Center on Longevity in collaboration with the Society of Actuaries (SOA) analyzed 292 retirement income strategies and are recommending the “spend safely in retirement strategy” as the best way to spend in retirement.

The spend safely in retirement strategy is designed to help middle income workers and retirees to decide when to retire, how much to spend in retirement and how to best deploy your financial resources.

The main goal of the strategy is to help you turn your assets — Social Security, the ability to work, savings and home equity — into the most retirement income possible. Learn more about the 5 Components of the Spend Safely in Retirement Strategy.

11. Anticipate Spending Shifts

You probably won’t be spending exactly the same amount year after year in retirement. As such your retirement income plan should anticipate those spending shifts.

Numerous studies show that, for most retirees, spending goes through three predictable phases:

  • When we first retire, we spend a little more than when we were working
  • As we continue to age, we generally start to slow down a bit and our spending slows down as well
  • In old age, medical expenses can cause spending to spike.

The NewRetirement Planner lets you customize different spending levels for different phases of your own retirement. This can help you to tailor your retirement income plan to your actual needs.

12. Go Old School: Invest

Financial gurus also say there’s nothing quite like the classics when you’re trying to build up, and preserve, income in retirement.

“The reality is that retirement investing should be treated the same as any other kind of investing: your goal is to achieve the highest return with the least risk of loss,” says Lee Tobey, fund manager at Hedgewise, Inc.

“Prioritizing dividends and interest at the expense of total return doesn’t make sense when you look at the facts,” he says.

Tobey continues, “The best strategy is to prioritize diversification and risk management above all. You want a mix of assets in your portfolio that can weather any economic environment while still generating expected returns of 5 percent or above. If you run an analysis on the last 70 years or so, this mix is:

  • 60 percent government bonds
  • 30 percent equities
  • 5 percent in real estate
  • 5 percent in gold

…There is literally no other mix of assets that has performed better on a risk­ adjusted basis.”

13. Consider Home Equity

Your home is likely your most valuable asset, not your retirement savings.

And, there are actually numerous ways to turn your home equity into retirement income.

  • If you get a reverse mortgage, then you can actually take your money in the form of a lifetime annuity or secure a line of credit. So, you get to stay in your home for as long as you live, but the home also provides a reliable income stream.
  • You can downsize, cash out some of your home equity and utilize some of the retirement income strategies in this article to create predictable income.
  • It might even be possible for you to rent out part of your home and generate income that way.

14. Be Tax Efficient with Withdrawals

Every penny counts when managing money in retirement and that is especially true when it comes to tax savings.

Every retirement account you have may be taxed differently and you will want to be strategic with how and when you take withdrawals from each bucket. A few tips to consider:

  • Prioritize withdrawals for your required minimum distributions — mandatory withdrawals that now start at age 73 and will rise to age 75 in 2033.
  • Consider a Roth conversion to spread out when and how much you are taxed.
  • Be aware of how much you withdraw each year and how the amount impacts your tax bracket.

Taxes are really complicated and what is best for you is different from what is best for anyone else.

Tax efficiency is one compelling reason why you might want to work with a good financial advisor for retirement. You will want to look for someone with experience specific to income taxes as well as someone familiar with retirement drawdown strategies. (Many financial advisors are well versed in helping clients save money but have less experience with managing and drawing it down in retirement.)

And, did you know that the NewRetirement Planner models your future tax liability. You now have the tools to make changes in your plan and see how it impacts this significant expense.

15. Ladder Up

“Laddering” investments is a method of staggering the maturity dates of a fixed-income investments. You purchase a series of fixed-income investments, such as certificates of deposit or bonds, with different maturity dates.

Bond ladders are one way of generating retirement income. For example, if you think that your retirement will last 15 years, with adequate funds you could buy 15 individual bonds — the first maturing in one year and the last maturing in 15 years.

This was a strategy used by Bud Hebeler who was able to significantly grow his retirement savings AFTER he retired. Learn more about bond ladders.

16. Use a 1-2 Punch to Make Sure Your Retirement Savings Will Last!

There are multiple ways to make sure your retirement savings last as long as you do. One way is to use a phased approach to utilizing your savings as retirement income.

Peter Tsui is the director of global research and design for S&P Dow Jones Indices. He suggests a method for handling longevity risk — you divide retirement into two phases and fund each phase separately:

Phase 1: The first phase lasts roughly from retirement age until age 85, which according to the Society of Actuaries, is close to the average life expectancy for someone who turns 65 years old in 2015. The actual average life expectancy is 87 — this means that you have at least a 50% chance of living longer than 87 (perhaps MUCH longer) and a 50% chance of living not as long.

Phase 2: The second phase is from 85 through the rest of your life — however long that might be.

To fund the second phase of retirement, Tsui recommends that at retirement you purchase a deferred lifetime annuity with income that will begin at age 85 and last until your death.

  • A deferred lifetime annuity is simply an annuity that you buy now for income that will start at a predetermined future date. Lifetime annuities pay income for as long as you live — no matter how long that will be.
  • The amount of income you will want to purchase will depend on the difference between any other guaranteed lifetime income sources like Social Security and the cost of your desired lifestyle at that time. However, be sure to also factor in healthcare costs which tend to increase as you get older.

Your remaining savings can be used for the first phase of retirement. Since the time period for using these assets is known, it is much easier to determine how much you can withdraw each year.

17. A Retirement Income Solution: Get a Little Help from the I.R.S.

Some experts argue that perhaps the best rule of thumb for determining a safe retirement withdrawal rate is to actually use the I.R.S.’s Annual Percentage Withdrawal Table to determine optimal retirement withdrawals — for any account (and at any age).

You are probably aware that starting at age 73 you are required to withdraw a certain percentage of your 401k and IRA savings each year in order to avoid hefty tax penalties. The amount you must withdraw is published by the I.R.S. — the Required Minimum Distribution tables. The I.R.S. determines your withdrawal amounts by applying a formula that is based on life expectancy tables. The balance of your account is to be divided by your life expectancy factor (the average number of years someone your age is expected to live).

So, the RMD retirement withdrawal strategy is to apply the I.R.S. RMD formula to any account you want to tap for retirement expenses, it doesn’t matter how old you are or the type of savings vehicle you are calculating.

As you age the percentage rises since you have a lower life expectancy, so at age 90 it’s about 9% of your total portfolio (for a married couple). If you had $500K remaining in your portfolio that would be about $45,000 in that year.

Learn more about the pros and cons of using RMD formulas to determine your retirement income strategy.

18. Retirement Income Strategies and Planning: Get a Real Plan and Keep it Updated

One of the best — and easiest — steps you can take to figuring out retirement income is to create a detailed retirement plan. You need to really dig into the details of your own financial situation and see how well that mixes with your hopes for the future.

  1. Start by assessing what you have
  2. Figure out exactly what you need and would like to spend
  3. Create a retirement income plan tailored to meet the demands you yourself will face in the future
  4. Look at the details that might sabotage your finances and build back up plans for those scenarios
  5. Maintain, update and tweak your plan overtime

The NewRetirement Retirement Planner is widely considered the best online planning tool. It is highly detailed and easy to use, best of all it saves your information so you can quickly make adjustments as your finances and plans evolve.

And, once you have set up a baseline plan you can try any of the scenarios described above and assess whether or not any of the strategies are a good idea for your future.

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Do it yourself retirement planning: easy, comprehensive, reliable

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