Your Retirement Center

The Last Paycheck

Retiring means stitching together different sources of income.

When you retire, you'll share a common experience with everyone who has already made the change: You won't get a paycheck anymore. Without this steady stream of revenue, you'll have to arrange for the income you'll need to live. Specifically, you'll need to consider the following:

  • What sources of income are you confident you can count on?
  • How much income will they provide each year?
  • How and when will the income be paid?
  • How will you coordinate payments from different sources to create a steady stream of income so that there's money in the bank when you need it?
WHAT THE SOURCES ARE You'll probably count on income from a number of different sources.
Social Security income is paid to people who contribute to the system, to their spouses, and in some cases to their dependents. Pensions provide income from a retirement plan your employer has established. Payments must begin when you retire or after you turn 72 in most cases. Salary reduction plans (401(k) plans and tax-deferred annuity arrangements) let you use pretax salary to accumulate savings for retirement. You must begin to receive payments either when you retire or after you turn 72 in most cases. IRAs are individual retirement arrangements in which your investments grow tax-deferred. You may begin withdrawals without penalty, usually after age 59½ and must take minimum required distributions from traditional accounts after you turn 72.
Annuities are tax-deferred insurance company contracts that can provide a regular stream of income, which may either continue throughout your lifetime or for a specific period you choose. Personal investments in stocks, bonds, mutual funds, real estate, CDs, and other products can provide retirement income, be converted to cash, or be used to buy income-producing investments. Jobs, either part-time or full-time, can provide income as you need it.
PUTTING IT TOGETHER Managing your finances during retirement involves juggling your sources of income to make sure you have enough money to live on. It's a lot like making a quilt: No piece by itself is big enough to keep you warm at night. But properly stitched together, the pieces can provide a lot of comfort.
The amount of income you'll receive from Social Security or a defined benefit pension depends on your work history and your final salary. In most cases, the longer you work and the more you earn, the more retirement income you can anticipate. On the other hand, defined contribution retirement plans (including salary reduction plans), IRAs, and variable annuities produce income in relation to the amounts you put into them and the earnings on those contributions. In the order in which they expect them, the major sources of retirement income for US workers are employee-sponsored retirement savings plans, such as 401(k)s and 403(b)s, Social Security, an employer-sponsored traditional pension or cash balance plan, continuing employment, other personal savings or investments, and IRAs, according to research conducted by the Employee Benefit Research Institute. In the future, though, there's consensus among retirement experts that employer pensions and Social Security will provide less. That means personal investment assets are going to play a much larger role for most people.
WHEN THE MONEY ARRIVES Unlike a paycheck, which arrives regularly, retirement income arrives on different schedules. Social Security checks and annuity and pension payments usually come monthly. Others, like stock dividends, arrive quarterly. Interest on most bonds is paid semi-annually. Few, if any payments, are weekly or bi-weekly. That means you have to think about balancing the amount coming in to meet your expenses.
Though you may have substantial net worth, not all of your investments may produce income. Certain stocks have value but don't give you access to cash until you sell them or use them as collateral to borrow. And unless you have thousands of shares, even stocks that pay regular dividends rarely provide enough money to live on. If your primary real estate investment is your home, it won't produce income either. You may be able to arrange a reverse mortgage, or loan against your equity. But unless you're quite old, the amount will be relatively small. What's more, you'll be increasing the amount of the loan that must be repaid every time you draw on your equity. An alternative is to shift your assets gradually into investments that provide income either through annuitization—a regular, lifetime payout from an annuity—or a systematic withdrawal arrangement. What you need to make the best use of your investment assets is a plan for producing the income you need and a strategy to make it happen.

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