Know What’s Fixed

One of the biggest challenges for people entering retirement is knowing how to start spending from their portfolios when they’ve spent an entire life saving. How do you even know where to begin to make sure you can do what you want, when you want, without the risk of running out of money?

A good first step is taking stock of how much set income you will have in retirement from sources other than your portfolio. While nothing is ever truly “guaranteed” retirement income, you can start to get a good idea of how much to reliably expect each year from things like Social Security, pensions, veterans benefits, and annuities with income riders that provide a contractual amount of income.

Tallying up the amounts from these different sources can provide a better understanding of how much you actually need to withdraw from your investment accounts versus relying on things like rules of thumb (4% rule anyone?) or generalizations. This can go a long way in reducing the risk of outliving your portfolio, allowing better tax planning, and most importantly eliminating anxiety of the unknown.

Know Your Timelines

Figuring out how much set income you can get outside of your portfolio sounds pretty simple, but knowing when those different sources of income kick in or when it is ideal to start taking certain types of income can be more complicated. Just because you CAN claim income at certain milestone dates or ages, doesn’t mean you SHOULD. Here’s a few things to keep in mind:

Retirement Accounts & Penalties

In most cases, you must be at least age 59 ½ to withdraw money from retirement accounts (both 401k accounts and IRAs) without an early withdrawal penalty of 10%. There are exceptions if you retire between 55 and 59 ½ and have a 401k plan at the job you retired from. If you plan to retire in your fifties, you will need to consider:

• Whether you have enough funds in the 401k plan with the company you will retire from or elsewhere to cover your expenses before you can start receiving other income, like Social Security and penalty-free withdrawals from IRAs.
• Balancing your saving and investing between tax-advantaged retirement accounts and general “taxable” investment accounts that don’t have rules surrounding when you can make withdrawals. Ideally you should be thinking about this well before you intend to retire to ensure you are setting your future self up for success…and you don’t have to go it alone. Working with a wealth advisor who understands your big picture gives you clarity on what actions to take now to get you where you want to go.

Social Security

You can start receiving Social Security income as early as age 62. However, if you choose to receive Social Security before your Full Retirement Age (driven by your birth year) the amount of income you receive will be permanently reduced.

• If you are planning with a spouse, there are additional timing considerations to make sure that you maximize your combined benefits and ensure optimal income for a surviving spouse.
• A wealth advisor can simplify this process, helping you understand all of your options and why it’s worth considering one over another based on your unique goals and objectives.

Required Minimum Distributions (RMDs)

Based on current laws, you must withdraw a minimum amount each year from pre-tax retirement accounts beginning at age 72. The actual amount will depend on the balance in your IRA and your age each year (but it’s usually around 3% or so).

• Because these distributions are considered taxable income, planning should be done in advance of retirement to determine the right mix of accounts to tap into each year to meet income needs before and after age 72.
• Much like with mise en place in cooking, creating your roadmap for income with a wealth advisor in advance of retirement will help make sure retiring is actually an enjoyable experience and reduce the risk of outcomes that take you off course.

How Does an Investment Portfolio Become an Income Source?

Knowing how much income you need and when you need it is the easy(ish) part. Knowing how to start using your investment portfolio to meet the difference between your planned spending and your set income is harder.

There are about as many opinions out there on what’s “best” as there are recipes for chicken – nobody can really tell you they have the answer for you without a deep understanding of your big picture and financial circumstances. While there are many approaches to tapping into a portfolio in retirement, here are a few things to keep in mind:

Passive Income Investments

A well-diversified portfolio may include investments that produce a “passive” income stream, meaning you receive income just by owning stock in a company that pays a dividend or owning bonds that have a set coupon payment. There are many types of income-producing investments that can be considered depending on your goals, personal circumstances, and risk tolerance.

• When you are far away from retirement and in saving mode (i.e. accumulating assets), you might reinvest this income, but as retirement nears, passive income becomes a nice supplement to your set sources of income.
• You can’t just end up with an income-producing portfolio overnight (at least not without incurring capital gains to reallocate/realign your portfolio with your goals). It literally pays dividends to plan ahead for your income needs when making investment allocation decisions in the years leading up to retirement.

Selling Investments

You can sell investments in your portfolio to create cash for your spending needs.

• We believe that cash is king – in case you need withdrawals from your portfolio to meet short-term spending needs, you should always have 12-18 months of cash to ensure you can get through rough patches in the market without losing sleep at night.
• There’s no hard and fast rule on what kinds of accounts (taxable or tax-deferred retirement accounts) are “best” to withdraw from. The answer depends on your situation – there may be tax reasons to withdraw from a combination of taxable and tax-deferred accounts or your unique estate plan may dictate what’s best. A wealth advisor is a valuable partner in helping you determine what’s best for you and adapting your plans over time based on the reality of a changing world.