How to Turn Retirement Savings into Retirement Income

Summary: The path to a secure retirement isn’t just about reaching a savings goal; it’s about ensuring those savings can sustain you for the rest of your life. This requires thoughtful planning and decisions that involve seemingly conflicting priorities such as financial stability, growth, and personal fulfillment.

During your pre-retirement years, you can actively prepare for a transition from receiving a paycheck to creating a paycheck. In this article, we’ll explore practical ways to convert your savings into a reliable income and empower you to create a retirement that’s not only financially sound but also fulfilling and relatively worry-free.

Assessing Your Retirement Income Needs

Your retirement income needs are likely to mirror your needs leading up to that golden phase. Most basic expenses won’t disappear at retirement, so plotting these in detail is essential.

Estimating your retirement expenses

Creating a detailed budget is fundamental and crucial for effectively managing your retirement money. Retirees typically need 70-80% of their pre-retirement income to maintain their lifestyle, but this varies based on individual circumstances.

Outline your expected retirement expenses, including essentials like housing, healthcare, groceries, and utilities. After estimating your expenses, determine how much income you’ll need to cover them. Consider changes in spending patterns, like decreased commuting costs and increased healthcare expenses. A realistic budget can make or break your retirement planning goals.

Factoring in longevity and inflation

You should plan for a retirement that could last 20, 30, or even more years. By factoring in longevity, you can better prepare to have sufficient savings to enjoy your retirement comfortably.

Inflation is another risk. Over time, inflation can devalue your savings and diminish your income. Ensure your retirement plan includes provisions for these factors, helping you maintain your standard of living as the years go by.

Understanding Different Sources of Retirement Income

Social Security

Social Security is the cornerstone of retirement income for many. Understanding how it works and making informed decisions about when to start collecting benefits can significantly impact your financial well-being.

You can begin claiming benefits as early as age 62 but delaying until full retirement age or even later can increase your monthly payments. Consider your health, life expectancy, and financial needs when deciding the optimal time to start receiving Social Security. Don’t forget to account for spousal benefits, which can provide additional income if you’re married.

Pension plans

If you’re fortunate enough to have a pension, it can be a valuable source of steady income. Pensions are typically offered by employers and provide a guaranteed monthly benefit based on your salary and years of service.

Understanding your pension options is crucial, especially if you need to choose between a lump-sum payment and monthly annuities. Monthly payouts provide predictable income, while a lump sum gives you more flexibility but an added responsibility to manage the funds wisely.

Be sure to check any survivor benefits, which can provide income for your spouse if something happens to you.

Personal savings

Your personal savings, including 401(k)s, IRAs, and other retirement accounts, are critical components of your retirement income. These accounts allow you to save tax-advantaged funds during your working years, which you can then withdraw in retirement. It’s important to understand the rules and tax implications of each type of account.

For instance, traditional IRAs and 401(k)s offer tax-deferred growth, meaning you’ll pay taxes on withdrawals, whereas Roth accounts grow tax-free, and withdrawals are tax-free. Strategizing how and when to withdraw from these accounts can help you maximize your income and minimize your tax burden.

Strategies for Creating Retirement Income

Once you’ve built a solid nest egg, the next step is to ensure that your savings translate into a steady income stream during retirement. This involves creating a plan to convert your investments into regular monthly income, allowing you to cover your living expenses and enjoy your retirement without financial stress.

Here are some effective strategies to make every retirement dollar count:

Annuities

Annuities can be an option for those seeking a guaranteed income stream in retirement. By purchasing an annuity, you essentially exchange a lump sum of money for a series of regular payments, which can last for a specific period or even for life. Annuity guarantees are backed by the claims-paying ability of the issuer.

• Immediate vs. deferred annuities: Immediate annuities start payments almost immediately after you invest, while deferred annuities begin payouts at a future date. Deferred annuities can be particularly useful if you want to ensure income for later years.
• Fixed vs. variable annuities: Fixed annuities offer consistent, predictable payments, making budgeting easier. Variable annuities, on the other hand, tie your payouts to the performance of the annuity subaccounts. This means your annuity value can fluctuate but also has the potential to grow.
• Pros and cons: The main advantage of annuities is the guaranteed income they provide, which can help cover essential expenses. Many annuities allow for an annual withdrawal of up to 10% of the balance without incurring surrender charges. However, remember that fully liquidating an annuity is possible, but that may be subject to surrender charges, taxes, and penalties. As a result, annuities can offer less liquidity than other investment options.

Spend down strategy from retirement accounts and investments

Making the shift from accumulating retirement savings to then spending that money in retirement can be difficult. One common approach to generating retirement income is to make systematic withdrawals from your retirement accounts, such as 401(k)s or IRAs or your investments.

• The 4% rule: This rule suggests withdrawing 4% of your retirement savings in the first year of retirement and adjusting that amount for inflation each subsequent year.

Note that this strategy is based on specific asset allocation in your portfolio, while fees, inflation, and other factors can affect your outcome.

As with any significant financial decisions, especially those involving complex factors, it’s advised to seek guidance from a financial professional before proceeding.

• Adjusting for market conditions: It’s important to remain flexible with your withdrawal strategy. During market downturns, you might consider withdrawing less to preserve your savings, while in better market conditions, you may be able to afford to withdraw a bit more.
• Risks and rewards: Systematic withdrawals allow for more flexibility and control over your funds, but they also expose you to market risks and the potential of outliving your savings, especially if investments underperform.

Investing in dividend-paying stocks and bonds

Investing in assets that generate regular income can be a key part of your retirement strategy. Dividend-paying stocks and bonds are two such options.

• Dividend-paying stocks: These stocks provide regular dividend payments, which can serve as a source of income. In addition to the potential for income, dividend stocks also offer the possibility of capital appreciation. Diversifying across different sectors can typically mitigate risks and help ensure a more stable income stream. Dividends are not guaranteed and are subject to macroeconomic and company-specific risks.
• Bonds and bond funds: Bonds are debt instruments that pay interest over time, making them a relatively lower-risk and predictable income source. Government and municipal bonds are typically lower-risk, while corporate bonds offer higher yields but come with more risk. Bond funds, which pool multiple bonds together, can provide diversification and steady income.
• Balancing risk and return: Both dividend stocks and bonds come with risks, such as market volatility for stocks and interest rate fluctuations for bonds. Balancing your portfolio to include a mix of income-generating assets can help manage these risks and ensure a more reliable income.

Real estate investments: Generating income through property

As a real estate investor, you can explore multiple avenues for generating income, whether through direct ownership or more passively.

• Rental properties: Owning rental properties can provide a steady stream of rental income, which could be a significant source of retirement income. While it requires an initial capital investment and ongoing management, rental properties can also appreciate in value over time.
• Real Estate Investment Trusts (REITs): REITs allow you to invest in real estate without the hassle of managing properties yourself. They pay out dividends from the income generated by their property holdings, providing a passive income stream. However, REITs can be sensitive to interest rate changes, fluctuate in value and come with high fees which can add risk to your investment.
• Risks and rewards: Real estate investments can be lucrative, but they also come with risks such as property market fluctuations, tenant issues, and maintenance costs. Ensuring you have a diversified portfolio can help mitigate these risks and stabilize your income.

Part-time work and passive income: Supplementing your savings

Many retirees find that continuing to work part-time or generating passive income helps boost their financial security and adds to their quality of life.

• Part-time work: Engaging in part-time work can provide not only additional income but also a sense of purpose and social interaction. This could include consulting in your area of expertise, freelancing, or even pursuing a new interest or hobby that provides an income stream.
• Passive income sources: Passive income streams, such as royalties from creative works, earnings from online businesses, or income from investments, require minimal ongoing effort but can provide a consistent cash flow. These sources of income are particularly valuable as they don’t rely on active participation in the workforce, allowing you more freedom to enjoy your retirement.
• Balancing work and leisure: The key is to find a balance that works for you. Whether it’s a part-time job or a passive income stream, the goal is to help supplement your retirement savings without detracting from your ability to relax and enjoy your retirement.

Embrace your retirement with peace of mind

There is no one-size-fits-all approach to making the switch from a standard paycheck to a monthly income in retirement. Your retirement money will likely be a combination of predictable income and variable incomes drawn from a balanced portfolio.

The best income strategy will depend on your personal financial situation, tax brackets and management, risk tolerance, and retirement goals. Mutual of Omaha is here to provide support and guidance. Our licensed financial professionals can work with you to create a plan that helps ensure your retirement years are more financially stable and fulfilling.

Find a financial professional near you.

FAQs

Q1: How do I balance different income sources in retirement?

To balance different income sources in retirement, diversify your portfolio with a mix of predictable income (Social Security, pensions, annuities, etc.) and variable income (such as investments and rental income). Regularly review and adjust your retirement income plan to match your financial goals and changing circumstances. Consulting with a financial professional is the best way to help make decisions with foresight and confidence.

Q2: What is a good monthly retirement income?

While there is no universal number to target, finding out what other retirees spend can be a starting point. A rule of thumb for most retirees is 80% of pre-retirement income. Retirement is a dynamic phase in life influenced by personal variables such as health and spending patterns, and external variables like inflation and market downturns. Seeking personalized guidance from a financial professional is prudent.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.