Article
Frequently Asked Retirement Income Questions
When should I begin thinking about tapping my retirement assets
and how should I go about doing so?
The answer to this question depends on when you expect to
retire. Assuming you expect to retire between the ages of 62 and
67, you may want to begin the planning process in your mid-to-late
50s. A series of meetings with a financial professional may help
you make important decisions such as how your portfolio should be
invested, when you can afford to retire, and how much you will be
able to withdraw annually for living expenses. If you
anticipate retiring earlier, or enjoying a longer working life, you
may need to alter your planning threshold accordingly.
How much annual income am I likely to need?
Financial professionals typically suggest that many people are
likely to need between 60% and 80% of their final working year's
income to maintain their lifestyle after retiring. But low-income
and wealthy retirees may need closer to 90%. Because of the
declining availability of traditional pensions and increasing
financial stresses on Social Security, future retirees may have to
rely more on income generated by personal investments than today's
retirees.
How much can I afford to withdraw from my assets for annual
living expenses?
As you age, your financial affairs won't remain static: Changes
in inflation, investment returns, your desired lifestyle, and your
life expectancy are important contributing factors. You may want to
err on the side of caution and choose an annual withdrawal rate
somewhat below 5%; of course, this depends on how much you have in
your overall portfolio and how much you will need on a regular
basis. The best way to target a withdrawal rate is to meet
one-on-one with a qualified financial professional and review your
personal situation.
When planning portfolio withdrawals, is there a preferred
strategy for which accounts are tapped first?
You may want to consider tapping taxable accounts first to
maintain the tax benefits of your tax-deferred retirement accounts.
If your expected dividends and interest payments from taxable
accounts are not enough to meet your cash flow needs, you may want
to consider liquidating certain assets. Selling losing positions in
taxable accounts may allow you to offset current or future gains
for tax purposes. Also, to maintain your target asset allocation,
consider whether you should liquidate overweighted asset classes.
Another potential strategy may be to consider withdrawing assets
from tax-deferred accounts to which nondeductible contributions
have been made, such as after-tax contributions to a 401(k)
plan.
If you maintain a traditional IRA, a 401(k), 403(b), or 457
plan, in most cases, you must begin required minimum distributions
(RMDs) after age 73. The amount of the annual distribution is
determined by your life expectancy. RMDs don't apply to Roth
IRAs.
Are there other ways of getting income from investments besides
liquidating assets?
One such strategy that uses fixed-income investments is bond
laddering. A bond ladder is a portfolio of bonds with maturity
dates that are evenly staggered so that a constant proportion of
the bonds can potentially be redeemed at par value each year. As a
portfolio management strategy, bond laddering may help you maintain
a relatively consistent stream of income while managing your
exposure to risk.1
In addition, many of today's annuities offer optional living
benefits that may help an investor capitalize on the market's
upside potential while protecting investment principal from market
declines and/or providing minimum future income. Keep in mind,
however, that riders vary widely, have restrictions, and that
additional fees may apply. Your financial professional can help you
determine whether an annuity is appropriate for your
situation.2
When crafting a retirement portfolio, you need to make sure it
is positioned to generate enough growth to prevent running out of
money during your later years. You may want to maintain an
investment mix with the goal of earning returns that exceed the
rate of inflation. Dividing your portfolio among stocks, bonds, and
cash investments may provide adequate exposure to some growth
potential while trying to manage possible market setbacks.
1Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability and change in price.
2Annuity protections and guarantees are based on the claims-paying ability of the issuing insurance company.