As retirement nears, there is more to think about than just which custodian we will use to roll over our retirement account once we leave our employer. Our retirement nest egg must not only supplement Social Security and any other streams of income we may have available, but it must also last the duration of our retirement years.
Retirement lasts a long time
Retirement has changed over the years. A period of life that used to be brief, retirement now lasts about 30 years for many people. The retirement period is almost as long as the time spent working.
With that in mind, planning an income stream in retirement requires careful consideration. It is not as simple as moving the funds out of the employer’s account and into a bank savings account or CD. Inflation will quickly erode the spending power of the nest egg.
While we don’t want to be overly aggressive in investing our retirement nest egg, we still should use a somewhat conservative combination of investments to help the income stream last the course.
Income streams for different needs
During our retirement period, we find that our cash flow needs change. Usually the earlier years in retirement require larger cash flow. There may still be a mortgage and/or car payment. Travel and vacations are usually more frequent as well.
Once the mortgage is paid off, expenses may decrease. However, there is still the possibility of additional health care expenses in the later years.
Income streams for different time periods
Another consideration when planning retirement income is the market volatility. If all funds are invested with the same asset allocation, a terrible market, like 2008, can greatly impact a retiree’s ability to fully fund all of their retirement years.
With that in mind, funds should be separated so that monies being used in the near future are invested less aggressively, and more securely, than cash that will be needed 10 or more years from now.
Multiple options for current needs
Current cash flow needs can be funded in a variety of ways. Options include, but are not limited to, CDs, mutual funds that invest in dividend-paying stocks, bond mutual funds, and single premium annuities.
CDs are currently not paying high interest rates, but it may be possible to get better returns than a regular bank savings account without taking on much additional risk. While it may not be the best choice for a large portion of retirement funds, it can work for a small portion.
Mutual funds that invest in either dividend-paying stocks or bonds will provide larger gains and higher interest rates than what is presently available with a CD. Since returns will fluctuate, this option should also be used for a portion of the portfolio.
Lastly, annuities are a great vehicle for creating a guaranteed income stream. There are many ways to set it up, depending upon the retiree’s goals. While they are great for short term, investors should be careful about tying too much up in one investment.
A financial professional can help a retiree create a long term action plan for their retirement income needs. Remember that there is a difference between a registered representative and an investment advisor. If we choose to seek out the assistance of a financial professional, we should find one who is able to offer financial planning and investment advice.
