I'm a Financial Adviser: This Retirement Income Plan Could Be Your Key to Sweet Dreams
Want to enjoy life after work without having to worry about market downturns or inflation? Creating a guaranteed retirement "paycheck" from several income sources is the answer.
As retirement gets closer, we work toward it with excitement. But when it finally arrives, many people experience uncertainty and stress.
The paycheck is gone, the stock market can become volatile, and an unsettling question keeps popping up: Will I be OK?
Peace of mind in retirement doesn't come from following the financial news or having a perfect forecast. It stems from knowing you have a financial plan that supports you and your lifestyle, no matter how much the market fluctuates.
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We can't predict when a market downturn will happen, but we can know what to do when it does.
A successful retirement plan isn't built on speculation. It's constructed on a foundation of ways to protect your income and lifestyle from permanent disruption. That approach leads to more predictability and much less uncertainty and worry.
Retirees who have a specific plan for market downturns are far less likely to make emotional decisions. Knowing which assets they'll use and which they'll leave alone creates confidence.
Given the volatility we've seen in the stock market in recent years (and recent weeks), it might be a stressful time to consider retiring. When we retire, the paychecks stop, but our expenses don't.
Social Security benefits and a pension, if you have one, generally aren't enough to support the same lifestyle you had when working. If we need to use our own money to replace that paycheck, how are we going to generate stable, guaranteed sources of income?
Retirement income can't depend on the market being up every year. It depends on having multiple income sources that also act as buffers against bad markets.
Transitioning from a steady paycheck to living off your assets is one of the biggest psychological and financial shifts you'll ever make. The goal is usually to create a "retirement paycheck" that feels as reliable as your former salary.
Some core strategies to consider
The bucket approach. This diversified strategy divides savings into short-term (cash), mid-term and long-term buckets to protect against market fluctuations while ensuring essential expenses are covered.
- The cash bucket holds one to two years of living expenses in high-yield savings or money market accounts
- The midterm bucket adds stability, holding three to seven years of expenses in bonds, CDs or Treasury bills
- The long-term/growth bucket holds stocks for long-term growth to combat inflation
Using a bucket strategy, diversifying assets and delaying Social Security benefits to help maximize payments are key to helping create a secure, long-term, inflation-resistant cash flow.
Annuities. These financial products offer a guaranteed income stream for a set period or for life, protecting against the risk of outliving savings.
- Fixed index annuities offer protection against market loss while providing a modest growth floor
- Immediate annuities allow you to exchange a lump sum for immediate, regular and guaranteed payments
- Single premium immediate annuities are often favored for their simplicity and high predictability
Bond ladders and fixed-income investments. Investing in bonds or bond funds provides regular, predictable interest payments. Building a "ladder" of bonds with different maturity dates ensures consistent interest payments and reduces interest rate risk.
As each bond matures, you use the principal for income or reinvest it at the end of the "ladder."
- Dividend-paying stocks. Investing in companies with a history of regular, stable dividends offers income potential with the possibility of capital appreciation.
- Real estate investment trusts (REITs). REITs provide income from real estate without direct ownership, offering dividends that often outpace inflation.
- High-yield savings accounts/CDs. These provide a safe, low-risk and predictable source of income, although with potentially lower returns than other investments.
Review your plan
Regular check-ins can help ensure your financial plan stays relevant. They allow you to make adjustments to reflect any changes in your lifestyle, your health and your goals.
More than anything, these reviews are about stepping back to make sure you're still on track for the life you want and to give you confidence and comfort when market downturns come around.
Keep your plan simple. Complex financial plans can create stress. Be clear on the purpose of each asset and create an easy-to-understand strategy. Clarity leads to better decisions and better sleep.
Remember: Peace of mind in retirement doesn't come from predicting markets or hoping for the best in terms of returns. It comes from being prepared for the downturns with a balanced plan that can weather them.
Dan Dunkin contributed to this article.
This appearance in Kiplinger was obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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