Create Your Own Paycheck: Generating Income During Retirement
Consumer Advocate Offers Advice on How Retirees Can Maintain a Flow of Income Throughout Retirement
Even as the U.S. presidential candidates debate the future of Social Security, the reality is that most of the 75 million Baby Boomers on the verge of retirement are going to have to look for alternatives to government programs to sustain their standard of living throughout their golden years. According to Certified Financial Planner Board of Standards, Inc. (“CFP Board”) Consumer Advocate, Eleanor Blayney, CFP®, the average monthly Social Security benefit of $1,2301 isn’t going to provide enough income to meet expenses. Retirees need a plan to spend their savings wisely while maintaining assets that grow and generate income.
“Today, many Americans are on their own when it comes to saving – and then spending – their retirement income,” says Blayney. “The majority of Americans will have to learn how to generate income using assets and investments they themselves have set aside in their retirement plans."
Creating a financial plan that produces income throughout retirement is one of 12 steps in CFP Board’s year-long “12 for ’12 Approach to Financial Confidence. Blayney suggests that prospective retirees consider these six pieces of advice when creating their retirement plans.
- Time your retirement carefully. The point in time when a retiree starts taking income from his or her retirement accounts can make a huge difference. Withdrawals from a portfolio during a bad investment market may diminish the sustainability of those savings by several years. In cases of bear markets, those able to delay retirement, and continue earning income rather than consuming assets, are in a much better position to avoid running out of money during their lifetimes.
- Don’t over rely on safe, income-producing investments. For most retirees, a healthy allocation to investments that will grow over time, rather than those that promise regular income, is warranted. It’s too simplistic to think that investments that pay interest or dividends are safe, whereas growth stocks are not. Bonds, for example, can provide predictable income. But bond issuers do sometimes default, companies cut their payouts to shareholders, inflation can reduce the purchasing power of those regular payments and in today’s low interest rate economy, it can be difficult to find yields on fixed income investments sufficient to maintain a retiree’s lifestyle. Unfortunately, this drives many retirees in search of higher yields, which carry unacceptable risk.
- Adjust your withdrawal rate to your needs. Generally speaking, there is a consensus that a 4 percent annual withdrawal rate – defined as the highest yearly payout from an investment portfolio that will not deplete the portfolio over a given period – is a reasonable payout over the life expectancy of most retirees. However, retirees should adjust this rate in certain situations. When an investment portfolio is doing well, or when there are large expenses, perhaps for medical costs, a higher rate may be warranted or necessary. An annual consultation with a CFP® professional can help retirees reevaluate their withdrawals in a way that fits the unique circumstances of their life.
- Don’t be afraid to spend capital from a retirement portfolio. Traditional IRAs, 401(k)s, 403(b)s, and self-employed plans are structured, under the tax laws, to be depleted over our lifetimes. Retirees are penalized if they fail to take principal from these accounts at a certain age. Many retirees find the prospect of spending down these accounts very upsetting, when, in fact, doing so under the guidance of a CFP® professional can result in a far more comfortable and secure retirement.
- Understand your tax obligations. Tax rates help determine acceptable savings withdrawals, and utilizing both taxable and tax-deferred accounts appropriately can help control the amount of taxes owed in any given year. Withdrawing from these two types of accounts can be critical to sustaining a retirement portfolio.
- Spending matters more than investments. Many retirees believe if they could just get their portfolio allocation and security selection “right,” they will have enough for their retirement. It may surprise them, however, to realize that in the studies done on sustainable withdrawal rates, the allocation of the portfolio providing the withdrawals was not very important to the results. In other words, the amount of fixed income in the portfolio could vary from approximately 35 to 65 percent without significantly changing sustainable withdrawal rates. This suggests retirees should focus primarily on expense management in retirement as the most effective way to ensure that their resources will last.
“Taxes, timing and spending are what matters most in creating income in retirement,” says Blayney. “A CERTIFIED FINANCIAL PLANNER™ professional can help you coordinate the three in designing an individual retirement income strategy that makes sense for you.”
1“Average Monthly Social Security Benefit for a Retired Worker,” U.S. Social Security Administration. Accessed on October 11, 2012. Online at <http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/13/~/average-monthly-social-security-benefit-for-a-retired-worker>
12 for ’12 APPROACH TO FINANCIAL CONFIDENCE
In January, CFP Board launched a new initiative called “12 for ’12 Approach to Financial Confidence” where all the components and steps for successful personal financial management are presented, one each month throughout the year including: establishing realistic goals, tax planning, emergency and risk management, investing, retirement, debt management, and estate planning.