ALL IN THE TIMING
There's a big difference between a regular source of income - such as a Social Security
check that's direct-deposited in your account each month - and income that's less
predictable or even unexpected, such as an inheritance. Extra money can come in
handy, but you can't depend on it to pay your bills.
But if you've planned ahead, your investments can play an important
part in providing additional regular income to offset predictable costs - the ones
that are due every month or quarter.
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You can get regular income from investments in several ways, based
on the kinds you own. Some, like
bonds, pay interest on a regular, predictable schedule. A number
of stocks
pay quarterly dividends.
You can also set up a system of regular withdrawals, or use cash to buy an immediate
annuity, which can provide fixed or variable income paid out in regular, usually
monthly, installments for a specific period of time, for your lifetime, or for two
lifetimes.
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ADDING UP THE INCOME
The big question is whether your combined sources of income will
produce enough money, year in and year out, for as long as you need it. The answer
is that they can, if your
return, or earnings on those investments, is greater than the rate
of inflation.
For example, several well-known companies have paid dividend income
to shareholders for years while the market value of their shares has fluctuated.
If you owned enough shares, you could count on the quarterly dividend payments to
help cover some of your predictable costs. You could also sell some shares when
the price increased a certain percentage and add the proceeds to an income-producing
account.
 On the other hand,
growth rates aren't predictable and dividends aren't guaranteed. So there may be
periods when income and growth slows or drops. That's why it's essential to own
a variety of investments, including some that guarantee a steady, if less than spectacular,
rate of return.
MANAGING YOUR INCOME
If you have a varied portfolio of investments in place as you approach retirement,
you'll make out best if you know how to tap them in the most productive ways. Here
are some of the things to consider:
- Learn the difference between investments designed to be
depleted, or used up in your lifetime, and those better suited to building an estate
- Create a withdrawal schedule to ensure that your
assets last as long as you need them, usually for your estimated
lifetime and perhaps your spouse's estimated lifetime as well
- Compare the tax consequences of different types of investments
so you get to keep more and pay Uncle Sam less over the years
DEPLETE OR PRESERVE?
Depending on your own needs and objectives, you can consider whether
you want to use most of your assets during your lifetime so that your estate will
be small, or you want to build an estate.
For example, federal tax law requires you to set up withdrawals
from pension plans and traditional IRAs so you're using up those assets during your
lifetime. Making regular withdrawals from your nonqualified annuities, also called
flexible premium annuities, which are also designed as retirement income programs,
works the same way.
In contrast, you can invest to build your estate, which means preserving
rather than depleting your assets. You're free to leave your taxable investments
untouched if you don't need the money, or you may choose to withdraw some of the
earnings while leaving the
principal to grow. Of course, there's nothing to stop you from
investing both ways, building some accounts you intend to deplete to subsidize your
retirement and others you intend to preserve to leave to your heirs.
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If you don't want to scale back your plans for retirement, you must be able to afford
them. That starts with making investments before you retire so that the income is
available as you need it. The second and equally important part of the job is managing
the income so your financial life runs smoothly.
