Turn Retirement Savings Into Income—Here’s How

JUL 30 | 2021
a man and a women sitting next to each other looking at a tablet

Most people dream about retirement—enjoying time with family, taking trips and maybe doing things you don’t have time for now. No matter how you imagine it, living in retirement will be very different from working towards it.

Learn how to create a plan for steady retirement income after you stop working, including withdrawal strategies to help make your money last. 

3 Steps to Planning for Steady Retirement Income

The first step in creating retirement income is to picture how you’d like to spend those years. This way you can understand how much money you’ll need and prioritize what’s most important.

1. Prioritize It

The first step is to picture what you’d like to do in retirement. This way you can understand how much money you’ll need and prioritize what’s most important.

Start by asking yourself questions about:

  • Logistics – Where will I live? Do I need/want a new car? What’s my retirement date?

  • Lifestyle – Will I travel, volunteer or get a part-time job?

  • Legacy – What will I leave to family, friends or philanthropic projects?

Now create a list of goals to determine which things you might add, defer or eliminate depending on your budget. Your list can look something like Our Retirement Goals sample list.

Our Retirement Goals

Stay in our house throughout retirement

Leave money to the kids/grandkids

Visit each of our three kids at least once a year

Help fund the grandkids' education

Travel to the Grand Canyon and go to Sweden

His: Volunteer at the hospital

Hers: Start a consulting business

2. Pay for It

Based on your goals, create a realistic budget and find out how to revise it for different phases of retirement. You may have dreaded this step and put it off, but your future is worth taking the time to plan.

Start by writing down your current annual budget and increase or decrease specific line items as needed. Some expenses such as taxes, gas, retirement savings, and daily lunches may go down when you stop working. Other expenses such as healthcare, travel and entertainment may go up. Be detailed when preparing your budget so it’s easier to adjust if needed.

The General Savings Rule

The general rule of needing 70-80% of your income in retirement may be changing. Recent stats show younger retirees may spend more.

If you find your financial plan won’t cover the things you’d like to do in retirement, there are ways to improve your readiness:

  • Delay retirement and save more.

  • Reduce future expenses.

  • Defer Social Security payments to maximize your benefits.

  • Evaluate how much risk you can take with your investments. More aggressive investments may help you grow your portfolio, but also come with more risk.

It might be a good idea to talk to a financial professional.

Start by using our interactive budget checklist to help you create an agenda, then call us for an appointment at 1-888-345-2441.

3. Plan It

Once your retirement budget is created, it’s a good idea to look at the biggest risks you could face and get ideas on how to manage them.

The four common risks retirees confront are:

Longevity Risk—Outliving Your Money.

Retirees are living longer, so you may need your money to last 20, 30 or more years. Otherwise, you may have to cut corners to avoid running out of money at some point. Careful planning may help manage longevity risk.

Help make your money last:

  • Choose a realistic time frame for how long your retirement money needs to last. If you retire at age 65, plan for 30 to 35 years.

  • Maintain an adequate amount of stock investments. This can potentially help your savings continue to grow; however, it does come with additional risk.

  • Pick a sensible withdrawal rate that you can maintain

Inflation Risk—Losing Purchasing Power.

Money being worth less over time, known as inflation risk, can have a devastating impact on your retirement. This can be true even when inflation is relatively low.

Help maintain your buying power:

  • Add inflation-hedging investments to your retirement portfolio.

  • Maintain enough stock investments so your savings potentially can keep growing.

  • Maximize Social Security payments, which automatically adjust for inflation.

As with all investments, there are risks of fluctuating prices, uncertainty of dividends, rates of return and yields. Current and future holdings are subject to market risk and will fluctuate in value.

Volatility Risk—Declining Markets.

Market declines, especially early in retirement, can undermine your portfolio.

Diminish volatility's impact:

  • Balance market highs and lows with a mix of investment types. You want investments that react differently when market conditions change.

  • Align how much of each kind of investment, known as asset allocation, with how much risk you’re willing to take. It may help you avoid panic in a downturn.

  • Maintain lower-risk investments to cover your first three to five years of retirement.

Overspending Risk—Choosing an Unrealistic Withdrawal Rate.

Spending in retirement refers to the withdrawal rate you choose from your savings. Taking too much can deplete your savings too fast.

Lower Withdrawal Rates Could Make Your Money Last Longer

(Hypothetical Example)

A graph showing withdrawal rate by years

These hypothetical situations contain assumptions that are intended for illustrative purposes only and are not representative of the performance of any security. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities. Assumes a portfolio with 50% equity, 45% bond, 5% cash allocation over 30 years at a 90% confidence level, with the following average monthly capital market returns: Stocks: 7.90%, 18.90% standard deviation; Bonds: 5.00%, 4.95% standard deviation; Cash: 2.25%, 1.00% standard deviation. The correlation between Stock and Bond returns is 0.2. Inflation rate is assumed to be 2% annually and is included in each of the withdrawal rates depicted above. Correlation measures the relationship between two investments--the higher the correlation, the more likely they are to move in the same direction for a given set of economic or market events. Standard deviation defines how widely returns vary from the average over a period of time. Source: American Century Investments, 2019.

Steady Retirement Income Needs a Good Withdrawal Plan

withdrawal strategy helps you know how much you can take out of your savings and investments each year to cover your needs and wants. It should also outline which funds you’ll withdraw from during retirement and in what order, i.e., retirement accounts, taxable accounts, etc.

Where Should You Withdraw from First?

Most financial professionals will recommend this order because of tax implications and the assumption that your taxes will be lower later in retirement. Start with the least to the most tax-efficient accounts. Of course, what you do depends on your unique situation.

  1. Taxable accounts – Non-Retirement Accounts

  2. Tax-deferred accounts – Traditional IRAs and 401(k)s

  3. Tax-exempt accounts – Roth IRAs

You can find many different strategies for withdrawing from your retirement investments. The one you choose should be based on your personal situation, including how well funded you are and your tax situation. Review three general withdrawal strategies.

To learn more, watch our short video series on retirement income.

Developing your plan can get complicated—this is when a professional may be helpful. Call us for help decoding and developing a retirement income plan for you. You don’t need to know the questions to ask, we’ll lead you through it—that’s why we’re here.

Get Help With Retirement Income

A Financial Consultant can help you plan or confirm a plan you’ve already started.

Diversification does not assure a profit nor does it protect against loss of principal.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.