4 Sources of Income for your retirement

After a lifetime of working and saving, retirement is the light at the end of the tunnel. Most of us think of it as a period of rest and relaxation when we enjoy the fruits of our labor. We envision a steady source of income without having to go to work every day.

It’s a great vision, but generating income without going to work tends to be a fuzzy concept during our working years. We know what we want but we’re not quite sure how it’s going to happen. How exactly will you turn your nest egg into a steady stream of cash during your retirement years? Developing a specific strategy based on these sources of income can help.

Basic Takeaways

  • Annuities give you a steady stream of income for life. However, the amount you receive may decrease in value due to inflation.
  • Strategic systematic withdrawals should be based on your cash flow requirements.
  • Bond and CD ladders can create a steady stream of income while being low risk.

4 ways to generate income after retirement

1. Immediate Annuities

Buying an immediate annuity is an easy way to turn a lump sum into an ongoing stream of income that you can’t outlive. Retirees often take the money they saved during their working years and use it to buy an immediate annuity policy because the income stream starts immediately, is predictable, and isn’t affected by falling stock prices or falling interest rates .

In exchange for cash flow and security, an immediate annuity buyer accepts that the income payment will never increase, meaning it actually decreases in value over time due to inflation. The biggest concern for most direct annuity buyers is that once you buy one, you can’t change your mind. Your principal is locked in forever and, after your death, the insurance company keeps the remaining balance in your account.

Annuities are complex products that come in many forms. Before you rush out to buy one, do your homework.

2. Strategic Systematic Exits

Even if you have millions of dollars in your bank account, taking it all out at once and tucking it under your mattress is not a strategic method of maximizing or protecting your income stream. Regardless of the size of your nest egg, the wise strategy is to withdraw only the amount of money you need and let the rest continue to work for you.

Calculating your cash flow needs and withdrawing only that amount of money on a regular basis is the essence of a systematic withdrawal strategy. Sure, withdrawing the same amount of money every week or month can also be categorized as systematic, but if you don’t match your withdrawals to your needs, it’s not strategic.

In one way or another, most people implement a systematic withdrawal schedule, liquidating their assets over time. Stock holdings, such as mutual funds and shares in 401(k) plans, are often the largest pools of money tapped this way, but bonds, bank accounts and other assets should also be considered. A properly implemented withdrawal strategy can help ensure that your income stream lasts as long as you need it to.

“For retirees withdrawing money for retirement from traditional IRAs (not Roth IRAs), 401(k)s and 403(b)s, the ‘right withdrawal amount’ is not their decision—instead, it is determined by the required minimums distribution (RMD) beginning at age 70½,” says Craig L. Israelsen, Ph.D., designer of 7Twelve Portfolio, based in Springville, Utah. “Generally,” adds Israelsen, “the RMD requires smaller withdrawals during the first five to six years (about age 76). After that, annual RMD withdrawals will be significantly larger for the rest of one’s life pensioner.”

The RMD age requirement has been raised to age 72 from age 70½ at the end of 2019 under the Securing Every Community to Enhance Retirement (SECURE) Act of 2019.

3. Scaled Bonds

Bond ladders are created by purchasing multiple bonds that mature at staggered intervals. This structure provides stable returns, low risk of loss and protection against market risk, as staggered maturities eliminate the risk of all bonds being called at once.

Bonds generally make interest payments twice a year, so a portfolio of six bonds will generate a steady monthly cash flow. As the interest rate paid by bonds is locked in at the time of purchase, periodic interest payments are predictable and unchanging.

When each bond matures, another is bought and the ladder is extended, as the maturity date of the new purchase appears further in the future than the maturity date of the other bonds in the portfolio. The variety of bonds available in the market provides significant flexibility in building a bond ladder, as issues of varying credit quality can be used to build the portfolio.

“Individual bonds—scaled across different sectors, asset classes and time periods—can provide a guaranteed return on capital (based on the viability of the issuing company) and a competitive interest rate,” says David Anthony, CFP®, president and portfolio. principal at Anthony Capital LLC, Broomfield, Colorado;

“I recently had a client who, when presented with this strategy, decided to take her company’s $378,000 lump sum pension buyout offer and buy 50 different individual bonds, from 50 different companies, without risking more than 2% on no company. spread over the next seven years. Her cash flow yield was 6% per annum, greater than her pension or an individual annuity.”

4. Scalable Certificates of Deposit

Constructing a certificate of deposit (CD) ladder mirrors the technique for constructing a bond ladder. Multiple CDs with different maturity dates are purchased, each CD maturing later than its predecessor.

One CD may mature in six months, for example, with the next maturing in one year and the next in 18 months. As each CD matures, you buy a new one and the scale expands as the expiration date of the new purchase is further in the future than the expiration date of the previously purchased CDs.

This strategy is more conservative than the ladder bond strategy because CDs are sold through banks and insured by the Federal Deposit Insurance Corporation (FDIC). CD ladders are often used for short-term income needs, but can be used for long-term needs if interest rates are attractive and provide the desired level of income.

Interest earned on CDs is only paid when the CDs mature, so to ensure maturity dates coincide with income needs, it is important to structure the ladder correctly. Note that some CDs have an automatic reinvestment feature, which could prevent you from receiving investment income. Make sure any CDs you use to build a retirement income stream don’t include this feature.

Having multiple sources of retirement income guarantees against investments not performing.

Other sources of income

For many people, funding retirement does not rely on a single source of income. Instead, their cash flow comes from a combination of sources, which may include a pension, Social Security benefits, inheritance, real estate, or other income-generating investments.

Having multiple sources of income—including a portfolio structured to include an immediate annuity, a systematic withdrawal plan, a bond ladder, a CD ladder, or a combination of these investments—can help you secure your income if interest rates fall or one of your investments returns less than expected.

The bottom line

A steady source of income during retirement is possible, but it takes planning. Save diligently, invest conscientiously, and determine the best payment options when it’s time to withdraw your money.

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