Building Your Retirement Paycheck
A question that needs unpacking – “How do I maximize my retirement income stream?”
Each financial asset you own fills a different bucket. This includes, but not limited to home equity, retirement plans, pensions, Social Security, CD’s, brokerage accounts. Draw the buckets. You may be surprised at how many you have accumulated over the years. One could be continuing to work or creatively engaging in the “gig economy”. You want to discern how to turn on spigots from each for your cash flow needs and desires. Like different liquids, each bucket is filled with various elements of access, availability, sustainability, composition, and taxation. You adjust temperature, pressure, duration of water usage depending on utilization. It should be the same with your financial flow in your fall season of life.
Here are four key considerations and potential financial tools that when combined with your personal retirement income style will help you decide how to maximize your cash flow in retirement.
Lifestyle – How do you maintain your standard of living? We are currently experiencing inflation pressures and you need to incorporate them. From food to health care, different sectors of the economy will experience different inflation rates. The only way to stymie inflation is to invest in asset classes that outpace it. Assets held in diversified stock-based investment accounts and real estate equity are good ways to address your long-term lifestyle needs. The other option is to decrease your standard of living over time.
Liquidity – What are your short term needs and how easy is it to tap into different assets that you have accumulated over time. How will you address “spending shocks” apart from regular spending? Keeping two years of income in cash (either inside your IRA accounts, or in a money market or savings account) will help you create liquidity and avoid the sequence risk of cashing in investments if/when the market has a correction. This amount will be less if you have turned on systematic income streams with a pension, annuity or Social Security. A savings account is very liquid, whereas collectibles may have less of a market when the time comes to sell them. You can also look to bond ladders, maturing sequentially or a stream from life insurance cash values.
Longevity – We make the most of our days, not knowing which will be our last. Social Security, pensions and annuities are the primary tools to hedge you against living “too long”. Once the spigot is turned on, they flow as long as you do. One strategy is to look at your fixed expenses and make sure you have set income from these resources to cover those costs. Once turned on, it is very difficult to turn it off. Marital status and survivor benefits are very important to look at to maximize these tools.
Legacy – Do you want to leave a financial legacy to family or community? There are tools and techniques to address this component keeping more money in your pocket now while also maximizing what you can leave to others. With the current portability of the $12.06 million federal estate tax exemption, most people need to be more cognizant of federal and state income taxes. Leave assets that will pass on tax efficiently such as real estate, non-qualified brokerage accounts or life insurance proceeds. IRA and other retirement accounts are very unfriendly tools to inherit as a non-spouse.
There are four retirement income styles developed by Dr. Wade Pfau and his team at The American College – Center for Retirement Income. Aligning these styles, alongside your financial preferences and personality will add another element of consideration in what fills your buckets. 1. A total return approach in which retirees essentially live off capital appreciation and income produced by their portfolios. 2. A safety first approach with laddered bond portfolios. 3. A safety first approach utilizing annuities as an income floor. 4. A hybrid risk wrap approach. Anecdotally, advisors see people who have worked in academics, non-profit sector, healthcare generally more comfortable with the security of annuities, while entrepreneurs prefer the flexibility of the total return approach.
It is a multifaceted, dynamic shift as you look at the financial capital you have set aside and nurtured for years to now work hard on your behalf. It is not a “one and done” decision but recalibrated as life plays out. When you bring on the right team together to assist you in optimizing the financial pieces, you are freed up to focus on maximizing your return on life.