Once you retire, you may breathe a sigh of relief that you’re done prioritizing retirement savings among all the other competing demands for your money. Congratulations; take a moment to celebrate! Then direct your attention to your new challenge: You must turn your retirement savings into a stream of income you can live on and ensure that it lasts throughout your retirement.
People choose different approaches to solving this puzzle. Below you’ll find pros and cons to four common strategies.
1. Create an income portfolio. You choose investments based on their ability to create income and use that income for living expenses, leaving the principal intact. Your portfolio might include some combination of bonds, dividend-paying stocks, money market accounts or funds and a ladder of certificates of deposit (CDs) with periodic maturities.*
Pros: Since this approach doesn’t tap the principal, it gives you peace of mind that you won’t outlive your nest egg.
Cons: The stream of income it produces, rather than being steady like your pre-retirement paycheck, will vary with market forces. Also, in a low-yield environment like the one we have currently, your holdings may not generate enough income to support your lifestyle.
2. Reinvest and rebalance. You reinvest all income, dividends and capital gains back into your holdings. Then you rebalance your portfolio regularly to bring your asset allocation back in line with your targets for each asset class (stocks, bonds, cash equivalents, etc.). Income is generated by the sale of a portion of your best-performing assets. Your target allocations may grow more conservative over time.
Pros: You’re forced to sell appreciated assets periodically while leaving the underperforming assets in place. As market cycles come and go, the underperforming assets may at a later date outperform the ones that are on top now, boosting your portfolio’s long-term total return potential
Cons: Rebalancing too often may prompt you to prematurely scale back on an asset class because of the need to sell an investment for cash.
3. Combine the previous two approaches. You rely on both income distributions and proceeds from rebalancing to meet living expenses. You start by using the income your portfolio generates and then, if that’s insufficient, you can rebalance to generate additional cash.
Pros: With two different ways to generate income, you have the flexibility to choose which one makes the most sense at the moment, given current market conditions.
Cons: Since income and dividends aren’t being reinvested, the portfolio’s long-term total return potential may be lower than with the reinvest and rebalance approach.
4. Purchase an annuity. With an immediate annuity, you can exchange a chunk of cash for a stream of income for your lifetime, yours and your spouse’s or another period that you choose.
Pros: The guarantee of lifetime income — which is unavailable with traditional investments — may be especially appealing to retirees who don’t have a pension.
Cons: Fees can erode some of the benefits of an annuity. Payouts on fixed annuities are tied to current interest rates so during periods of low rates (such as now), payouts may be relatively low. The creditworthiness of the insurer is also a risk factor.**
A Client Advisor at Seaside National Bank & Trust can help you choose and deploy a strategy for using your nest egg to support you throughout retirement. Get in touch with us to start your retirement planning.
* Money market funds seek to maintain, but do not guarantee, a stable $1 net asset value.
** All guarantees are by the issuing insurance company and are subject to the claims paying ability of the insurance company. Be sure to investigate the financial strength and stability of the issuer.
Investment and insurance products:
Not federally insured
Not a deposit of this institution
May lose value