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Your Bank > Education and Advice > CNB University

Creating Income in Retirement

L Haelen 2016
Laurie Haelen, AIF® is Senior Vice President and Team Leader - Wealth Advisor and can be reached at LHaelen@CNBank.com or (585) 419-0670 x41970.

For many, retirement has become something different from what it once was.

Now, many retirees are just as active in retirement as they were when they were working full time. They are filling their days with meaningful non-profit work and embarking on second and third careers that they likely could not afford to try in their earlier lives.

Regardless of what you plan to do in your retirement, if you have collected a paycheck for the past many years, you will need to find ways to replace the cash flow by generating income from the money you have saved. The common sources of retirement income — Social Security and defined benefit pension plans — may or may not be enough to support the lifestyle you have mapped out for your golden years. If you have been saving in a 401(k), 403(b), IRA or another type of retirement plan, some sound financial planning can determine both how to draw income from these assets as well as the best way to ensure that they last as long as possible.

Drawing on Interest and Dividends

One simple way to create an income stream from your investments is to draw only the interest and dividends and have them deposited electronically into your bank account. This method is simple and makes it very unlikely that you will run out of funds, as you are not tapping into principal. The portfolio that is optimal for this strategy in a low interest rate environment is one that is a combination of income-producing assets such as dividend paying stocks, real estate investment trusts, and bonds. The strategy can be implemented on your own, with mutual funds or individual securities or with the help of a professional advisor to oversee the portfolio and ensure you are adequately diversified and thereby managing risk. The drawback to this strategy is that it limits the control you have over the income you receive, as it is dependent on the current interest rate and dividend payout environment.

Managed Payouts

Another strategy that could provide more income is one that experts call managed payouts. In this method, you apply a safe withdrawal rate to the portfolio and draw that amount on an annual basis. Many have touted the “4% rule” as a good number to start with. For the past several decades, the annualized returns of a balanced investment portfolio have in most cases outpaced this number. There is no guarantee, however, that the future returns will reflect those of the past. There are many factors to look at to arrive at the number that works best for your circumstances, including: your risk tolerance, your asset allocation, and inflation and market outlook. It is best to use financial planning tools or the help of a financial planner to arrive at the appropriate withdrawal rate and to monitor it over time to ensure it is still optimal for the current environment.

Immediate Annuity

Purchasing an immediate annuity is another option for investors seeking current income, and the options have become much more sophisticated over the years. The basic premise is that you purchase an annuity from an insurance company, which pays you a monthly benefit for your lifetime, creating a do-it-yourself pension. You may also protect your spouse or partner with a joint and survivor annuity, which will pay a monthly income as long as either one of you is living. There is even an option to purchase an inflation-adjusted immediate annuity that gives you a cost of living increase every year to account for inflation. The downside to this method of income replacement is a lack of flexibility, as once you have signed the contract you most likely cannot change your mind or get your money back.

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These are just some of the options to create an income stream from your savings in retirement. In order to ensure a successful retirement, it is critical to utilize all of the resources you have to make these important decisions. If we can help in any way, give us a call and we can work together to make your retirement the best that it can be.

How CNB Can Help

If you would like to discuss in more detail, I am available to answer any questions you may have. Please call me today at (585) 419-0670, ext. 41970 or LHaelen@CNBank.com.

This material is provided for general information purposes only and is not a recommendation or solicitation to buy or sell any particular security, product or service. Past performance is not indicative of future investment results. Any investment involves potential risk, including potential loss of capital. Before making any investment decision, please consult your legal, tax and financial advisors. Non-deposit investment products are not bank deposits and are not insured or guaranteed by Canandaigua National Bank & Trust, or any federal or state government or agency and are subject to investment risks, including possible loss of principal amount invested.