5 Ways to Preserve Your Retirement Income

5 Ways to Preserve Income HeaderOne of the biggest concerns that new retirees have is how to maintain their income in retirement. Going from a steady paycheck to relying on your assets can be a big change — not just practically, but emotionally. Even if you have access to a pension or have started taking Social Security, you might be worrying about how you can make your income last throughout retirement.

There are a number of ways to tackle the problem: here are five ideas to get you started!

1. Explore alternative income sources

You might be starting retirement with some combination of Social Security, a company pension, or your own retirement savings. One way to help boost your confidence about meeting future income needs is to add alternative income streams on top of these. This can be especially helpful if you’re concerned about managing withdrawals from your 401(k) or IRA.

One option could be an annuity: fixed annuities provide a steady, guaranteed income for life or for a pre-determined amount of time. Variable annuities offer control over investment options and the ability to participate in growth, but they also carry the risk of losing income or principal in down markets. While variable annuities are designed as a contract with an insurance company, they have the characteristics and risk of an investment. They may also come with different fee structures or costs.

In all cases, it’s important to remember that annuity income is guaranteed by an insurance company, so the payments are contingent on that company’s ability to pay). Also, all annuities require a long-term commitment and a willingness to part with a large lump sum in exchange for receiving income and/or investment returns over time.

Annuities aren’t the right fit for everyone, but with life expectancies increasing — the life expectancy of men aged 65 is 30% longer today than it was in 19501 — an annuity might be a contender for generating income in old age.

2. Manage risk in your portfolio

You may have had your retirement savings invested in a mixture of stocks and bonds throughout your working life. In the approach to retirement, many people start to adjust those asset allocations to reduce volatility and exposure to risk.

While asset allocation cannot ensure a profit or prevention of loss in times of declining values, lower volatility can help to preserve your principal in the short term, which can help to allay fears about your asset base falling or not being available to finance an emergency. However, low volatility also limits upside potential.

If you enjoy a long retirement, your portfolio may not grow enough to keep up with inflation and support you in the long run. For example, assume your conservatively invested account grew 3% last year. After inflation, which was 1% for the year ending February 20162, as indicated by the Consumer Price Index, the realized return (not incorporating fees or taxes) was 2%. Thus, if you wanted to draw down 4% of your account balance to finance your expenses this year, you’d have to tap into your principal. This isn’t necessarily a bad thing, but depending on your asset base, time horizon, and portfolio allocation, it could lead to problems down the line.

Of course, please note that many factors determine the rate of return on your investments, and inflation rates change. The actual rate of inflation will vary.

All in all, when it comes to managing risk and retirement income, it’s important to balance short term needs with long term goals. While managing risk in your portfolio can help to protect your income streams today, going too far in a conservative direction can actually add risk later; namely, the risk that you’ll outlive your assets.

Talk to your advisor about how to manage these risks in a way that is suitable for your investment objectives.

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3. Try a flexible withdrawal rate from your retirement account

At this point, you might be thinking, “But why can’t I just use the 4% rule and leave it at that?”

Many retirees have come across the 4% rule of retirement account withdrawals. The idea is that you calculate 4% of your account balance at retirement and draw down that dollar amount every year, adjusted for inflation.

Unfortunately, a 2013 study found that the 4% rule might not be so safe after all.3 Starting with stock market valuations and bond yields as of April 15, 2013, the researchers used a mathematical model to simulate long term stock market and bond returns. For a portfolio with 40% in stocks and 60% in bonds, the researchers found that using the 4% rule resulted in only a 48% chance of successfully generating 30 years of retirement income.

In other words, the chance of failure was 52%.

While past performance is not indicative of future results, this study shows that heavy attention should be placed on your withdrawal strategies.

Again, it’s a matter of balancing short term needs with long term goals. Having a rule for withdrawals that’s based on what is actually happening in your account can help to reduce the risk that you’ll draw down too much too soon. While it can make budgeting more complicated from one year to the next, a flexible strategy means you can retain control over your retirement accounts and adapt over time.

4. Tighten your belt

Having a flexible draw-down strategy can help you preserve your asset base, but it may also require some belt-tightening in retirement. The good news is that your costs may drop dramatically once you leave the rat race. For example, you’ll probably no longer have to set aside a portion of your income for savings, and the expenses associated with going to work every day fall by the wayside.

But to help reduce risk (and free up resources for new hobbies and endeavors) it’s a good idea to consider cutting costs where you can.

One way to help preserve capital is to downsize your home. This is often an emotionally difficult decision, but for many retirees the financial argument is strong: selling your house can help add money to your savings, and the ongoing costs associated with maintaining a smaller home are usually lower.

But there are other things — big and small — that you can do. For example, you could consider selling one of your cars, or plan travel around off-peak seasons. With the flexibility of time that comes in retirement, you can be creative about reducing costs where you can.

5. Get creative with making money

Finally, you might also want to consider getting creative with generating retirement income.

Sometimes that can mean going back to work: you could lend your expertise as a moonlighting consultant or take up part-time employment in an industry you’ve been curious about. If you went this route, you’d be in good company: a recent survey found that 72% of pre-retirees over age 50 actually want to keep working in retirement!4

With retirement sometimes lasting two decades or more, it can be a great time to learn new skills or go back to an early-career love — and get paid for it.

There are other options too. Some retirees choose to invest part of their savings in assets like rental property, or even turn a home or apartment into a holiday rental. Others look to make money from skills or longtime hobbies. The options are practically unlimited!

All in all, retirement is a time of transition: not just for your life, but for your finances. The pursuit of financial security in retirement requires a clear idea of your goals, your concerns, and what measures will be the easiest for you to adapt into your own life. With some creativity, and perhaps some help, you can work to set yourself on a path to enjoy this new phase of your life to the fullest.

Act Today!

We can discuss this topic and more in person at a complimentary appointment. As a bay area retirement specialist we can give you a review and make suggestions based on your retirement objectives.

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1 Shlomo Benartzi, Alessandro Previtero, and Richard H. Thaler. “Annuitization Puzzles.” Journal of Economic Perspectives, 2011. http://befi.allianzgi.com/en/Publications/Documents/allianz-annuitization-puzzles-final.pdf
2Bureau of Labor Statistics. http://www.bls.gov/cpi/home.htm
3 David Blanchett, Michael S. Finke, and Wade D. Pfau. “Asset Valuations and Safe Portfolio Withdrawal Rates.” June 2013. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2286146
4 Merrill Lynch and Age Wave. Work in Retirement: Myths and Motivations. 2014. https://www.ml.com/publish/content/application/pdf/GWMOL/MLWM_Work-in-Retirement_2014.pdf

The information presented this article is general in nature and not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.
The guarantees of an annuity contract, including fixed returns, payouts, and death benefit guarantees are contingent on the claims-paying ability of the issuing insurance company.
Annuity withdrawals are taxed as ordinary income and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 591⁄2. Surrender charges may also apply during the contract’s early years.
Variable annuities are investments and are subject to market risk, investment risk, and possible loss of principal. Variable annuities may have higher internal fees associated with the product.
Variable annuities are sold by prospectus. Variable annuities contain fees and charges including, but not limited to mortality and expense risk charges, sales and surrender (early withdrawal) charges, administrative fees and charges for optional benefits and riders. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.

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