By Jay Shareef and Chris Rhoads
Transitioning from diligently saving for retirement to carefully spending your retirement savings requires finesse and intentional strategy. For federal employees, this shift can be particularly daunting without a well-crafted withdrawal plan in place. But fear not—we at WealthFlow Financial specialize in simplifying the complexities and crafting personalized plans that empower you to make the most of your retirement savings. In this article, we reveal 5 tips to generate income from your portfolio in retirement to help every decision count in your favor.
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.
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:
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.
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.
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.
Another important consideration for generating retirement income is annuities. Annuities can provide you a guaranteed 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 security that comes from a guaranteed 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.
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 WealthFlow Financial.
Navigating the shift from saving for retirement to spending your retirement savings can pose a significant challenge, particularly for pre-retirees in the federal employee demographic who may lack a well-defined withdrawal strategy.
At WealthFlow Financial, our team is knowledgeable and experienced in assessing your retirement income requirements and devising a tailored plan to optimize your hard-earned savings. Take the first step toward building your financial future by reaching out to us at (301) 798-5250 or schedule a phone call now to explore the range of options available to you.
Jay Shareef is vice president, financial advisor, federal benefits consultant, and co-founder at WealthFlow Financial. As a U.S. Army veteran, Jay is passionate about helping federal employees create a bulletproof plan for retirement and navigate the often confusing and complicated federal benefits landscape. He spends his days educating and providing clients with unbiased insurance benefits and retirement strategies to help his clients create guaranteed income for life. As a problem-solver and trustworthy resource, Jay always puts his clients and their needs first so they can find financial peace of mind. He holds the Chartered Federal Employee Benefits ConsultantSM (ChFEBCSM) credential. To learn more about Jay, connect with him on LinkedIn.
Chris Rhoads is a co-founder and vice president of WealthFlow Financial. As a registered investment advisor and independent financial professional, Chris is committed to helping his clients in retirement and he takes a holistic approach to financial planning that includes insurance and risk management, investments and wealth management, retirement income planning, and estate and tax planning. He holds the Chartered Federal Employee Benefits ConsultantSM (ChFEBCSM) certification. Chris has been married to his wife, Tia, since 2009 and they live in Frederick, MD, together with their two young daughters. In his free time, Chris enjoys traveling, watching sports, and being active in causes about which he cares passionately. To learn more about Chris, connect with him on LinkedIn.