your working life, you’ve received a paycheck on a set, regular basis.
And, you probably knew exactly how much each check was going to be. Now
you’ve retired, and rolled over your 401(k) and other retirement plans
into your IRA. You’ve saved diligently and have accumulated wealth
within your plans, but now what? How do you transition your wealth into
income to cover your living expenses?
We’re going to take a look
at the different investments you might use to generate income, some
strategies for distributing your income, a few things to keep in mind
on an ongoing basis, and finally, we’ll look at additional planning
that you should be doing at this stage of life.
you retire, you’ll want to reevaluate your overall asset allocation, to
make sure your portfolio is structured to generate the income that
you’ll need. Some of the investments that you may want to consider at
this point are:
Convertible Bonds and Convertible Preferred Stocks
your needs are determined, your financial advisor can help you
determine the right distribution strategy for you. Here are a few to
Systematic Withdrawal. With a
systematic withdrawal strategy, you take a fixed amount from your
account on a periodic basis – let’s say monthly. Your account will
likely have a combination of assets that are generating some income,
but if, in a given month, your investments don’t generate enough
interest and dividends to cover your distribution, you may also dip
into some of the principal from your account. If you are using this
approach, your overall allocation may have a greater allocation to
equities to help make sure that your account growth keeps pace with
your distributions and you aren’t depleting your nest egg too quickly.
Interest and Dividends only.
If you are receiving fixed income from other sources, such as Social
Security and a pension, you may want to consider this option. If you
are in a position where you can tolerate a fluctuating distribution,
using this strategy will help you to keep your principal intact, while
still generating income for you. One common way to achieve this is
through a bond ladder.
Bond Ladders. Bond
Ladders can help balance the need for steady income while helping to
maintain your principal investment by protecting you from fluctuations
of interest rates while you continue to manage the cash flow from the
Here’s how it works: Let’s say you were going
to make a $100,000 investment. Instead of investing in one or two large
bonds that would limit your flexibility, you purchase 10 smaller bonds,
($10,000 each) with maturities varying from one to 10 years. The bonds
pay you interest, and each year one of the bonds in your portfolio
matures. When it does, you re-invest that principal into a new, 10-year
bond. This helps you avoid some of the risk associated with
fluctuations of interest rates. If you opt to make a few larger
investments, you run the risk of having your bonds mature coinciding
with a period of low interest rates, which would greatly reduce your
What will your bond ladder look like?
the number of years, and the number of bonds in your portfolio. (A 10
year ladder will mean 10 bonds, and 10 rungs on your ladder.)
the distance between the rungs, which is determined by the duration
between the maturity of the respective bonds. Although most bond
ladders are structured with one year between maturities, they can be
created with a range of maturities anywhere from every few months to a
specific investments within your ladder. Just like a real ladder might
be made from wood, aluminum or fiberglass, your ladder might be
constructed from government bonds, corporate bonds, municipal bonds or even certificates of deposit.
Rebalance & Re-evaluate | Stay on Track.
Now more than ever, it’s crucial to have periodic reviews with your
financial advisor to make sure your plan is on track. Depending upon
current economic conditions, you may need to reevaluate your income
distributions. Or, if your personal needs have changed (you vacationed
in Palm Springs and decided that you want to move there), your advisor
needs to be aware to help you stay on-track.
Required Minimum Distributions.
Once you turn 70 ½, you will be required to take minimum distribution
payments from your tax-deferred accounts such as Traditional IRAs or
401(k) plan. Your financial advisor and tax professional can work with
you to make sure you are meeting the IRS requirements.
Make sure that all of your accounts and estate documents have correct
beneficiary designations. Take the opportunity to establish and fund
any trusts or other estate planning vehicles that will help transition
Business Succession Planning.
If you own a business, be sure to have a succession plan in place so
that the business you’ve worked so hard to build can continue on as
party of your legacy.
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