How Do I Get Retirement Income From My Portfolio?

By Chris Palabe, CFS®, AIF®

As a dedicated employee or business owner, you’ve dedicated years to hard work and saving. With retirement on the horizon, you’re ready to enjoy the rewards of your efforts. But you may be wondering how to transform your savings into a steady income stream. This guide walks you through the top 5 strategies for generating income from your portfolio during retirement.

Determine How Much You Can Safely Spend

Before making any decisions about how to withdraw from your portfolio, it’s crucial to first understand how much you can safely spend. The last thing you want is to spend too much based on a general rule of thumb and risk running out of money later in retirement. There are a number of factors to consider when determining how much you can safely spend, including long-term goals, lifestyle expenses, expected life span, and healthcare needs. Working with a qualified financial professional is a great way to determine the right amount for your needs.

Understand the Different Withdrawal Strategies

Once you have determined how much you can safely spend, it’s time to look at the different withdrawal strategies available. In general, there are two main methods for turning your savings into income:

Systematic Withdrawal Approach

With the systematic withdrawal approach, you withdraw a fixed percentage of your retirement savings each year, typically between 3% and 5%. The general rule of thumb is 4% in the first year of retirement and increase the amount each year to account for inflation. The withdrawal rate is based on the value of the portfolio at the start of each year, so the amount of income can fluctuate depending on market performance. 

This strategy allows you to generate a steady stream of income while still allowing for flexibility and potential growth of your investments. However, it’s important to monitor the withdrawal rate to ensure the portfolio can last throughout retirement. 

Bucket Approach

Another way to optimize your portfolio longevity is to divide your savings into different buckets to match different time horizons. Each bucket will have investments tailored to that time horizon in terms of asset class, risk level, and liquidity.

One common approach is to divide your portfolio into three buckets: 

• A short-term bucket will be invested conservatively in cash, bonds, and other low-risk assets. This bucket is for your expenses over the next 1-3 years.
• A medium-term bucket will be slightly more aggressive, investing in a mix of stocks and bonds to generate growth and income over the next 3-10 years.
• A long-term bucket will take on much more volatility by investing primarily in stocks or other growth-oriented assets for expenses that are 10-plus years away.  

By dividing your portfolio into buckets, you can potentially generate income from your medium-term and long-term buckets while ensuring you have the funds you need for near-term expenses. Keeping the long-term bucket invested in growth assets also increases your odds of keeping pace with inflation over time. 

Maintain Tax Efficiency

You may not think much of it, but the order in which you withdraw from your investment accounts can significantly impact the longevity of your portfolio. In general, it’s best to spend your taxable accounts first, followed by your tax-deferred (or pre-tax) accounts, and finally your tax-free (Roth) accounts last.

Spending your taxable accounts first can help minimize your tax liability in retirement. This is because withdrawals will be taxed as capital gains rather than ordinary income as long as the underlying investments were held for longer than a year. This strategy also allows your investments to grow tax-deferred longer. 

Once you have exhausted your taxable accounts, you can begin withdrawing from your tax-deferred accounts. Since these accounts are subject to ordinary income taxes, it’s important to plan your withdrawals carefully to minimize the tax hit.

Finally, once you have exhausted your taxable and tax-deferred accounts, you can begin withdrawing from your tax-free accounts like Roth IRAs and Roth 401(k)s. Withdrawals from Roth accounts are not subject to income taxes, making them a valuable source of tax-free income for future use.

Consider Annuities

Another important consideration for generating retirement income is annuities. Annuities can provide you a more reliable source of income in retirement. When you purchase an annuity, you pay a lump-sum premium to an insurance company in exchange for regular income payments over a set period of time, or for the rest of your life. 

Annuities can be a good option for retirees who want the stability that comes from a consistent income stream. However, it’s important to consider the fees associated with annuities, which can be higher than other investment options. Additionally, it’s important to select an annuity that fits your needs and goals, as there are many different types of annuities available with different features and benefits. 

Working with a financial advisor can help you determine if an annuity is a good option for you and which type of annuity is best suited for your retirement income plan.

Don’t Forget About Long-Term Growth

Many people are quick to assume that retirement means your portfolio must become ultra-conservative, consisting only of cash and bonds as a way to safeguard against market volatility. While your portfolio should become slightly more conservative, you still need assets geared toward long-term growth.  

As tempting as it is to invest solely for income, avoid investing your entire portfolio in income-producing assets like bonds or dividend-paying stocks. The interest payments received can fluctuate wildly from year to year and your payments are unlikely to keep up with inflation. Dividend investing also has some major disadvantages, including higher fees and taxes, as well as questionable historical performance.

Those looking to maximize their retirement savings should invest in a diversified portfolio that includes both income and growth-style investments. Of course, the specific allocation that’s right for you depends on your individual financial goals, risk tolerance, and other factors. This is something we can help you determine at Palabe Wealth.

Have Questions About Your Retirement Income Plan?

For many people, moving from saving for retirement to utilizing those savings can be a difficult shift, particularly without a clear withdrawal strategy. At Palabe Wealth, we can help you evaluate your income needs and craft a thoughtful plan to optimize your retirement savings. 

Schedule a 20-minute introductory phone call or call us at 847-249-6600 to learn if we are the right fit for your financial goals. Or you can email me directly at Chris@palabewealth.com.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. 

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Asset allocation does not ensure a profit or protect against a loss.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. 

Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.