If you’re nearing retirement age, you most likely have a nice little nest egg you’re sitting on that will act as your income once the paychecks stop rolling in. But how do you take that money and turn it into income that will last throughout your retirement?
Here are three strategies based on the amount of money you have saved and how much income you rely on. In this example, we’ll assume one million dollars in retirement savings for all of these strategies.
Total return strategy
If you only need to withdraw less than 3% of your savings annually, the total return strategy may be your best option.
Say you have a pension that covers a chunk of your expenses and all you need is another $2,000 each month. With a million-dollar nest egg, that’s only a 2.4% annual withdrawal. This strategy means you can put all of your assets into one big pot. Every year, you should rebalance the allocation to ensure that your desired breakdown between asset classes remains consistent. When you are only taking distributions from your nest egg of 3% or less, your withdrawal rate is likely to stay maintainable indefinitely.
If you need between a 3% and 4.5% withdrawal rate from your nest egg to maintain your lifestyle, you should consider the bucket strategy. Withdrawing $3,500 each month, or 4.2% each year, is not advisable if all of your assets are in one pot.
Instead, consider separating your money into three buckets. In the first bucket—your “short-term bucket”—you’ll want enough cash assets to cover five years of withdrawals, so $210,000. This bucket should be your lowest risk, so investing it is not recommended.
The second bucket is the intermediate-term bucket. This will hold your income-producing assets, including real estate, dividend-paying stocks, credit funds, and annuities. And as you drain your short-term bucket, you’ll use the funds from the intermediate-term bucket to replenish it.
Lastly, your third bucket will be the money you’re investing for growth, so this will continue to hold your stock portfolio. Because the first two buckets should be enough to live on for at least 10 years, you’ll most likely be able to ride out any dip in the market and still come out on top. When equity markets have good years, you’ll use the assets in the long-term bucket to replenish the first two. However, when equity markets have bad years, you’ll be able to avoid selling low and can give your long-term assets time to recover before doing any rebalancing.
Contractual income strategy
If you still need more income—say, $5,000 each month—the final strategy is the contractual income strategy. At a 6% withdrawal rate, you’ll need to consider converting a portion of your nest egg into an income stream by looking at annuity options, insured portfolios, and other vehicles that will ensure you won’t run out of money.
Keep in mind this is the most expensive option but structured properly, this strategy can provide the extra income you need to have a dignified retirement without unnecessary risk of running out of money.
The strategy you utilize for retirement income is largely dependent on how much income you need relative to how much you’ve been able to save. Starting to save for retirement early gives you more time to grow a big nest egg so you have more options when it’s time to turn your savings into income.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Brotman Financial Group, Inc. and BFG Financial Advisors are not affiliated with Kestra IS or Kestra AS.