With retirement within sight, now’s the time to figure out how to turn your savings and investments into a paycheck – so you can live comfortably and still achieve your goals. For many, the challenge is easier said than done, and comes alongside fears of spending too much now and not having enough later or the worry of denying yourself if you don’t spend enough. Here are seven ways to help you get and stay on the right track.
Start with streams of consistent and reliable retirement income that will serve as your main source of cash flow. The key is identifying which one, or combination of sources, such as Social Security, pension payments, employment income or annuity payouts, you can use to cover your necessary expenses.
Decide what your retirement needs truly are, things like mortgage payments, groceries, utilities, insurance, transportation and healthcare, and ensure you have a variety of stable income sources to meet those needs. Your advisor can help you analyze each one and run hypotheticals to help you gain confidence in their ability to withstand changing market conditions.
If your needs aren’t quite covered by your main sources, you may have to turn to other income streams to fill the gaps. These are the assets you specifically set aside to fund your retirement and supplement your reliable income – think 401(k), IRAs, checking and savings accounts and CDs. If those needs are already covered, you can use overflow to pay for the wants (such as vacations and hobbies) and wishes (such as charitable giving and your legacy) that reflect your ideal retirement.
Although you can’t guess just how long you’ll live, you can account for longevity risk by spending wisely for a greater chance of your money lasting as long as you need it to. No need to go to extremes, but avoid unsustainable spending patterns, even if the markets and your portfolio are doing well.
You likely already understand the potential benefits of asset allocation – diversifying your wealth across multiple assets to temper risk. But maintaining multiple types of accounts across various firms may get confusing, particularly when it comes to managing money from several sources. It may be more helpful to consolidate all your cash into a single account with reporting tools, where you and your advisor can keep track of and analyze your inflows and outflows as often as you need to.
Since retirement may last two to three decades, you’ll need access to immediate liquidity, capital preservation to meet today’s needs and growth potential to attempt to keep pace with future expenses, which are likely to be higher.
A bucketing strategy can help earmark a certain portion of your portfolio in relatively safe and liquid investments (think cash and cash alternatives) so that you feel confident that your needs will be met over the short term. The rest of your portfolio would be dedicated to growth investments that may help give you a better chance of funding long-term goals.
Also, have an emergency fund or ready liquidity available to pay for the unexpected. This gives you access to funds in times of market volatility or other unforeseen circumstances to avoid selling longer-term investments at an inopportune time.
It may sound good in theory to save your principal and live off the interest. But interest rates are still relatively low, so it may be a bit more difficult to generate enough interest to create meaningful cash flow, especially over the long term. Inflation happens to be low now, too, but over time it could erode the buying power of your cash.
That reality doesn’t mean you should ignore your tolerance for risk and invest outside your comfort zone in an attempt to reach for incremental yield or income. Even in retirement, it is important to know what you own and why you own it to avoid jeopardizing your entire portfolio. Instead, take a total return approach that relies on diversification, including income from bonds and capital appreciation potential.
Pay attention to how taxes could affect your actual take-home “pay” and work with a tax professional to help generate the most after-tax cash flow in retirement. Look at asset location, which divvies investments up among various types of accounts for tax-efficiency: Taxable, tax-deferred and tax-free.
The withdrawal order may also affect your tax obligation. Your advisor can provide guidelines for withdrawing your retirement income to ensure tax-favored assets enjoy that status for as long as possible.
Sources: Janus Henderson Investors; Fidelity; Raymond James research
Raymond James financial advisors do not provide legal, or tax advice. You should consult your legal and/or tax advisors before making any financial decisions. There is no assurance any investment strategy will meet its goals or be profitable. Investing involves risk, and investors may incur a profit or a loss. Withdrawals from tax-deferred accounts may be subject to income taxes, and prior to age 59 1/2 a 10% federal penalty tax may apply.
Asset allocation and diversification do not guarantee a profit nor protect against a loss. Raymond James is not affiliated with Janus Henderson Investors and Fidelity.