Generating Retirement Income
In retirement, most of your expenses occur on a monthly basis. Thus, most retirees prefer their income on a monthly basis. Income includes both interest and/or dividends, and in some cases, return of principal. Investment vehicles that provide monthly income include mutual funds, government mortgage-backed securities, and fixed annuities. Using these investment vehicles, you can build a portfolio that provides monthly income.
Other income producing investments, although not monthly, include certificates of deposit, treasury notes, and treasury bonds. The incomes from these investments helps cover day-to-day expenses. Since the payments are made regularly, you can plan on them.
Retirees may need growth in their portfolio to combat inflation. As investments with growth potential increases in value, you can make withdrawals without decreasing your original principal. The key is to have a well-rounded portfolio of both income producing investments and investments that can perform inflation. Diversification is a key element in managing your portfolio.
You can time certain investments by using a strategy called laddering. Using fixed income investments with fixed maturity dates, you divide your investable dollars into equal amounts (say five). Then put one-fifth into instruments maturing in each of five years. If interest rates go up when the first maturity date comes, you reinvest at the higher rate. If rates have declined, only one-fifth of your portfolio has to be reinvested at this lower rate, while the rest continue to grow at the higher rates. Spreading maturities in this manner should increase your yield over time, and also produces a steady flow of income.
> Generating Monthly Income
> Sources of Cash During Retirement
> Social Security
> Pension Plans
> Personal Savings
> Protecting Your Cash in Retirement
> Sources of Cash
> Determining Your Expenses in Retirement
Retirement Plan Distributions
Retirement planning is generally viewed as a three-step process. Phase 1 is the projection phase where you determine how much to save for retirement. Phase 2 is the accumulation phase where you save and invest for retirement. Depending on how much you’ve saved for retirement, you may still be in phase 2. Some people must still save even in retirement, so that retirement planning is an ongoing process. Phase 3 is the distribution phase which is comprised of two interrelated parts:
- Selecting a distribution option
- Taxation of distribution options
Now that you’re retiring, you probably thought the decision making process was over and that you could just put your feet up. This is not the case! You now have to decide how you would like to withdraw money from your retirement plan(s). Some retirement plans have only one option; you simply receive a monthly annuity payment for as long as you live, and if you are married, for as long as your spouse lives, if he or she survives you. Other plans have a number of annuity options to choose from, as well as a lump-sum distribution option.
Which option is best for you depends on a number of factors, including your family situation and your ability to manage large sums of money. In many cases, the tax treatment of the retirement distribution does not have to be a controlling factor because lump-sum distributions can be rolled over to an IRA without tax consequences. But the tax consequences should be considered, and you must consider penalty taxes when making your distribution choice.
> What Initiates a Distribution
> Retirement Plan Distributions
> Lump Sum Distributions
> Annuity Payouts
> Rollovers
> Rolling Over Proceeds to a Traditional IRA
> When do You Have to Start Taking Distributions
> Penalty Taxes Related to Distributions
> Comparing 401(k) and 403(b) Distributions
Learn From Their Stories
> Empty Nesters - Paul & Julie
> About to retire - Steve
> Living in Retirement - Anna
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