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Retiring means stitching together different sources of income.
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When you retire, you'll share a common experience with everyone who has already
made the change: You won't get a paycheck anymore. Without this steady stream of
revenue, you'll have to arrange for the income you'll need to live. Specifically,
you'll need to consider the following:
- What sources of income are you confident you can count on?
- How much income will they provide each year?
- How and when will the income be paid?
- How will you coordinate payments from different sources
to create a steady stream of income so that there's money in the bank when you need
it?
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THE INCOME THEY'LL PROVIDEThe amount of income you'll receive
from Social Security or a defined benefit pension depends on your work history and
your final salary. In most cases, the longer you work and the more you earn, the
more retirement income you can anticipate.
On the other hand, defined contribution retirement plans (including
salary reduction plans), IRAs, and
variable annuities produce income in relation to the amounts
you put into them and the earnings on those contributions.
In the order in which they expect them, the major sources of retirement income for
US workers are employee-sponsored retirement savings plans, such as 401(k)s and
403(b)s, Social Security, an employer-sponsored traditional pension or cash balance
plan, continuing employment, other personal savings or investments, and IRAs, according
to research conducted by the Employee Benefit Research Institute. In the future,
though, there's consensus among retirement experts that employer pensions and Social
Security will provide less. That means personal investment assets are going to play
a much larger role for most people.
INVESTMENTS BUT NOT INCOME—YET
Though you may have substantial
net worth, not all of your investments may produce income. Certain stocks
have value but don't give you access to cash until you sell them or use them as
collateral to
borrow. And unless you have thousands of shares, even stocks that pay regular dividends
rarely provide enough money to live on.
If your primary real estate investment is your home, it won't produce income either.
You may be able to arrange a reverse mortgage, or loan against your equity. But
unless you're quite old, the amount will be relatively small. What's more, you'll
be increasing the amount of the loan that must be repaid every time you draw on
your equity.
An alternative is to shift your
assets gradually into investments that provide income either through annuitization—a
regular, lifetime payout from an annuity—or a
systematic withdrawal arrangement. What you need to make the best
use of your investment assets is a plan for producing the income you need and a
strategy to make it happen.
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Glossary
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Interactive Demos
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Our Products
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