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Who Will Provide Your Retirement Paycheck?

J Terwilliger 2014
James P. Terwilliger, PhD, CFP®
Senior Vice President, Senior Planning Advisor
[email protected]
(585) 419-0670 x50630

Most of us rely on ongoing paychecks from employers during our working years. But many folks preparing to retire don’t give much thought to the “paycheck” that will provide a dependable, steady stream of monthly income during their post-employment years.

Planning the sources of that “paycheck” is as critical as accumulating retirement assets in the first place.

What income sources do you have?

Your retirement “paycheck” will likely be funded, in part, from sources providing regular monthly payments - Social Security, one or more pensions for those fortunate enough to have employer-sponsored defined benefit pension plans, and perhaps an immediate fixed annuity using a portion of your accumulated assets.

A second source of regular income, at least temporarily, might come from part-time employment following retirement from a primary career. This is becoming a more popular option as life expectancies increase and people find that they enjoy some sort of transition between fulltime work and no work.

Finally, distributions from employer-sponsored (401(k)/403(b)/457) plans, individual retirement accounts (IRAs and Roth IRAs), and after-tax investments/savings can help supplement your regular income sources.

A combination of all of the above will constitute your “paycheck”.

How large a “paycheck” should you target?

Experts used to suggest 70%-80% of pre-retirement income as a rule-of-thumb target. Many planners today recommend closer to 100%. While it is true that pre-retirement expenses associated with Social Security withholding and savings contributions will be lower (or even zero) in retirement, other expenses associated with increased travel/leisure activities and health care needs may be correspondingly higher.

Most important – Be sure that what you want is consistent with what you can afford. A balanced cash flow must be planned for. Living above your means does not work anytime, particularly in retirement!

What asset allocation should you maintain in retirement?

Studies have shown that a balanced portfolio – somewhere in the 50% stocks and 50% fixed income (bonds-cash) range – is about right for retirement. Your personal risk tolerance might drive this ratio up or down a bit. Such a mix recognizes that regular distributions will be taken from the portfolio during retirement, a much different situation from the pre-retirement accumulation phase when a higher fraction of stocks is generally more appropriate.

Such a mix also enjoys reduced volatility, since stocks and fixed income investments typically move in different directions during bear and bull market cycles. Lower volatility helps preserve capital in accounts from which distributions are taken regularly.

It is important that both the stock and fixed income portions of the portfolio be broadly diversified across a wide spectrum of US and foreign investment asset classes in order to achieve the best risk-adjusted return.

How much can you afford to withdraw from your nest egg?

Retirement experts lean toward a conservative withdrawal rate. They don’t all agree on what withdrawal rate is “safe”, but 4%-5% is a common recommendation. The objective is to ensure that you don’t outlive your money.

One suggested approach is to start distributions at this level, then increase the distribution each year by inflation. By doing so, annual distributions provide constant spending power.

How CNB Can Help

Developing a retirement “paycheck” plan that is right for you depends on your goals and unique financial and personal situation. Consider partnering with one of our financial planners to help chart your path forward.

This material is provided for general information purposes only. Investments and insurance products are not FDIC insured, not bank deposits, not obligations of, or guaranteed by Canandaigua National Bank & Trust or any of its affiliates. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please consult your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.