THE INCOME THEY'LL PROVIDE
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. 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.
On the other hand, defined contribution retirement plans (including
INVESTMENTS BUT NOT INCOME—YET 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.