One of the perks of a 9-5 job is the regular, biweekly paycheck. When the rest of life is unpredictable, especially when it comes to your finances, having reliability is valuable. But reliance on a regular paycheck could cause problems when it’s time to retire and you may be forced to budget from a lump-sum retirement nest egg. Fortunately, there are some common options to create a stream of pseudo-income and help ensure that your retirement savings could last your lifetime.
4% Withdrawals
Scheduling regular cash withdrawals from your investment portfolio, which can take the form of a Roth IRA, 401(k), or traditional investment portfolio, can mimic income through retirement. Historically, according to Investopedia, the 4% rule has been considered a safe withdrawal rate in retirement. The conventional wisdom was that as long as you don’t withdraw more than 4% of your portfolio per year, the average market growth rate should ensure your savings don’t run out.
Unfortunately, that rule of thumb has changed in recent years due to people living longer and lower expected long-term returns. 4% is no longer a “set-it-and-forget-it” number. While it’s an accessible option, automatic withdrawals from a retirement portfolio may be risky when retirees are not actively involved. If you choose to use this method of retirement income, be sure to regularly do an inventory of what percentage you are taking out of your portfolio, your asset allocation, and risk tolerance, and how much you are spending per month. This will allow you to calculate how much you will need going forward to help your funds last through retirement. Rather than basing your withdrawals on a standard percentage, base them on your needs.
Income Equities
While the primary reason people may invest in stocks is typically to capture market returns, which according to NerdWallet have hovered around 10% over the past 50 years, some publicly traded companies also disperse profits to shareholders by paying dividends. These dividends, or excess profits typically paid to stockholders on a quarterly basis, are especially attractive in a low-rate environment.
While potentially consistent, dividend-heavy portfolios can be risky due to less diversification. According to Motley Fool typically, smaller companies pay lower dividends than larger companies, making them less attractive, but they can also have a higher growth rate, making them better market investments. For the everyday investor, balancing a stable stream of income and navigating those nuances through dividends alone may be tricky. While dividends may be a great supplemental income, they may not be a secure way to fund retirement in totality.
Income Annuities
Guaranteed lifetime income annuities on the other hand take a lot of the math out of the equation and help ensure you will not run out of money during retirement. Lifetime income annuities deliver payments at regular intervals, whether monthly, quarterly, semi-annually, or annually, for as long as you live. The amount of the payment is determined when the annuity is purchased and can never decrease, even during times of economic volatility. Especially if you are in or approaching retirement, utilizing income annuities may be a great way to help ensure your savings last a lifetime no matter the economic environment.
Talking to your adviser about your income needs and using a lifetime income annuity in your portfolio may reduce budgeting concerns by securing a new paycheck – one you worked hard to earn and can confidently spend in retirement.