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Retirement Income Principles

As more than 76 million baby boomers – nearly 25 percent of all Americans — approach retirement age in the next 20 years and make the transition from retirement saving to retirement spending, a recent survey reveals that one-third of those who say they are just five years away from retirement have not even calculated how much income they will need in retirement and results suggest nearly half are baffled about how to invest their hard-earned money to help maximize retirement income.

The “Retirement Income Principles” below are centered on helping investors plan income generation strategies that fit their retirement goals, an often-overlooked and overwhelming area of retirement planning.

Saving for retirement is something most Americans know they must do, but many people are confused, scared, and literally frozen when it comes to flipping the switch from saving to withdrawing.  People even just a year or two away from retirement are uncertain with how to tap their savings effectively once they transition to retirement.  The Retirement Income Principles are designed to help give people clear and actionable guidance on how to make that transition happen successfully.

Retirement Income Principles

Below are nine principles which can be used when planning for retirement income:

  1. Review your situation. Know how much money you’ve earmarked for retirement, where you keep it, and how much, if anything, you want to leave to heirs. It’s also important to understand your tax situation, both now and for your projected retirement duration.
  2. Maintain a year of cash. Set aside an amount equivalent to what you’ll need from your portfolio for at least a year. This is the money you’ll use – along with your regular sources of income – to cover all expenses throughout the year.
  3. Consolidate income in a single account. When possible, you may want to deposit your regular sources of income into the account where you keep your year of cash. Or, you might choose a similar type of account where funds can be easily transferred.
  4. Match your investments to your goals and needs. As you begin to rely on your investments for income, you may feel most comfortable investing heavily in income-generating bonds and CDs. But to counteract the long-term effects of inflation, you may need to keep a portion of your savings in growth-oriented stocks as well.
  5. Cover essentials with predictable income. Divide your expenses into essential and discretionary categories and cover the essentials with predictable income sources.
  6. Don’t be afraid to tap into your principal. Chances are, you’ll need to supplement interest and dividend income with measured withdrawals from principal. And while it’s natural to be concerned about spending your savings too quickly, there are ways to help tap your portfolio with a high degree of confidence that your money can last.
  7. Follow a smart portfolio drawdown strategy. To supplement your predictable income sources such as dividend and interest income, Social Security, pension payments, and rental income, consider drawing money from your retirement portfolio in this order: Start by drawing principal from maturing bonds and CDs; Take your required minimum IRA distribution if you are 70 ½ or older; Sell over-weighted assets in your taxable accounts; Sell from your tax-advantaged accounts starting with Traditional IRAs, then Roth IRAs. Your tax situation may impact the optimal withdrawal strategy to be used.
  8. Rebalance annually to stay aligned with your goals. Annual portfolio rebalancing is especially important when you’re retired. There’s less time to recover from the potential losses of lackluster returns caused by a portfolio that has strayed from your chosen asset allocation.
  9. Stay flexible and re-evaluate as needed. Things change. Situations change. Markets change. Priorities change. It’s important to periodically revisit your portfolio asset allocation to stay aligned with your broader investment goals.

Generating income in retirement is something investors are struggling to tackle and often times don’t address until it is too late.  Planning is key and as market volatility continues to impact retirement accounts, utilizing these principles and creating a solid retirement income plan can help investors weather market swings and help reduce the risk of making critical mistakes.

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