Here are some options on how to tap income in retirement
To enjoy a comfortable retirement, you may need to balance multiple types of income streams in your portfolio. This could help you achieve the most advantageous mix of investment growth, income and tax control that’s appropriate to your risk tolerance, income horizon, and goals. These streams can come from the following sources:
Retirement accounts – Funds held in your 401(k) or IRA can be used as a source of income.1 Financial planners generally recommend that you withdraw no more than 4% from your retirement accounts in the first year of your retirement. But that guidance comes with a caution light: If the market drops significantly in that year, you may want to take a far lesser amount than 4%, and then gradually increase the percentage to match the rate of inflation after markets begin to recover.
Bonds – These are “IOUs” issued by a government agency or a corporation, and generally pay you back your principal and a fixed rate of interest over a specific time period. Although bonds have paid relatively lower yields over the past 10 years, that is starting to change. The most efficient way for most investors to access a well-diversified portfolio of bonds is generally through a mutual fund that allows you to set up systematic monthly withdrawals. It’s important to note that bond funds generally entail less risk than stock funds, but they also tend to offer less reward.2
Social Security benefits – Social Security benefits generally replace about 40% of an average wage earner’s income after retirement and are an important source of lifetime income.3 However, with a lower birth rate, there is some growing concern that Social Security benefits, if no changes are made to the system, may not be fully available beginning in the year 2035.4 A sensible retirement plan should only rely on Social Security for a portion of retirement income. One rule of thumb suggests that if you consistently save 10% of your income for 40 years, you should have enough — combined with Social Security — to maintain your pre-retirement lifestyle (assuming prudent withdrawals).
Dividend-paying stocks – Some mature companies return a portion of their profits each year to holders of their stock in the form of dividend payments. Many investors consider the payment of a reliable and/or rising quarterly dividend to be a sign of a company’s health and sustainability.
Please note that dividends are not guaranteed, nor are companies in which you invest obliged to pay dividends.
Annuities5– Issued by an insurance company, an annuity converts a single lump sum of money into a regular stream of income payments, either with a fixed or variable rate of interest, for a predetermined amount of time.
As with any investment strategy, it’s important to plan, and learn about your options. Working with a financial planner or advisor can also be a useful way to explore your income options once you stop receiving a regular paycheck.
1 Withdrawals from a qualified plan are subject to ordinary income taxes and a 10% federal tax penalty if taken prior to age 59½.
2 Investing in bonds and bond funds entails risk, including the risk of losing money. Bond-investing risks include interest rate risk, call risk, duration risk, refunding risk, and default and credit risk. For a helpful discussion of these risks, visit FINRA’s website: http://www.finra.org/investors/understanding-bond-risk
3 Understanding the Benefits 2019, SocialSecurity.gov. https://www.ssa.gov/pubs/EN-05-10024.pdf
4 “A Summary of the 2019 Annual Reports,” Social Security and Medicare Boards of Trustees. https://www.ssa.gov/oact/TRSUM/
5 All annuity guarantees are subject to the claims-paying ability of the issuing insurance company.