Many people dream about the day they can finally retire. But even with savings built up, you’ll need to keep investing once you stop working. This helps make your post retirement investing last longer.
When you retire, you lose your normal incoming paycheck. Your investment portfolio has to provide the cash you need each month – this is called generating income from investments. Doing this properly is key to not running out of retirement savings.
The media talks a lot about saving up a big nest egg for your later retirement years. But there’s less advice on the smart ways to invest and withdraw from that nest egg once you are retired. This is an important blind spot that can cause problems.
When you retire, your investing needs to change. Before, you invested in the future. Now you need your investment portfolio to create a steady income stream to pay regular retirement expenses. This needs careful asset allocation and withdrawal strategies.
The goal is an investing strategy that allows your portfolio to keep growing to protect against inflation and provide income for a very long retirement. At the same time, you don’t want to withdraw too quickly and run out of money.
The good news is that with proper investment strategies and retirement investing planning, you can structure your diversified portfolio to dependably pay you through your entire retirement. Then you can enjoy this life stage rather than constantly worry about depleting your savings.
Coming up, we’ll cover retirement-specific advice on investing approaches, investment types ideal for income, withdrawal rates, tax tips, and more. We’ll also discuss when to use professional investment advisors.
Continue reading to learn retirement investing strategies that can turn your current savings into a lifelong income once you retire.
Figure Out Your Income Needs in Retirement
Before picking investments for retirement income, you need to estimate how much money you’ll actually need each month once retire. This forms the basis for your retirement income investing strategy.
There are two parts to this:
1) Tally up your sources of retirement income first. This includes:
- Social Security payments
- Any pension or annuity income
- Earnings from part-time work
- Rental property income
- Other income streams
2) Next, calculate your expected expenses in retirement. This covers:
- Essential expenses like housing, healthcare, etc.
- Discretionary spending on travel, hobbies, etc.
- Don’t forget inflation – costs rise over decades
Using a Retirement Income Calculator
The easiest way to forecast your income needs is with an online retirement income calculator. This tool estimates how much money you’ll need based on your specific income sources and expected expenses.
For example, say your calculator inputs are:
| Retirement Income Sources | Monthly Amount |
|---|---|
| Social Security | $2,000 |
| Part-time job earnings | $1,000 |
| Total | $3,000 |
| Expected Retirement Expenses | Monthly Amount |
|---|---|
| Housing, utilities, food, etc. | $4,000 |
| Travel, leisure, etc. | $1,500 |
| Total | $5,500 |
In this case, your investment portfolio would need to provide at least $2,500 per month to cover your gap between income and expenses.
This retirement income need then helps determine:
- Your overall asset allocation across investments
- Which income-producing investments to favor
- A sustainable withdrawal rate from the portfolio
The calculators also let you model different life expectancies and investment return scenarios to ensure your money lasts through retirement.
Review Your Income Need Annually
Your specific retirement income needs can change from year to year. Be sure to re-evaluate this figure at least once annually to adjust for inflation, portfolio performance, new expenses, and any other changing circumstances.
Creating the Right Asset Allocation for Retirement
With an estimate of your needed retirement income, it’s time to structure your investment portfolio properly. The biggest factor is getting the right asset allocation Across different investment types, forming a diversified portfolio of growth.
In retirement, your portfolio allocation looks a bit different than when you were still working and saving. The priorities shift from just growth to a balanced approach to seeking growth and income.
The Role of Different Asset Classes
Your retirement portfolio should have exposure across major asset classes like:
- Stocks for growth potential
- Bonds and fixed income for stability
- Cash And cash equivalents for short-term needs, are key in the early years of retirement
Having a diversified mix helps manage risk as you’ll be relying on these investments to fund a portion of your income needs for decades.
A typical target asset allocation for retirees may look something like:
| Asset Class | Allocation % |
|---|---|
| Stocks | 40-60% |
| Bonds | 30-50% |
| Cash | 5-15% |
The actual percentages depend on your risk tolerance, age, income needs, and overall retirement timeline. Those with longer retirement horizons can hold more stocks for growth.
Account Types to Use
You’ll want to hold your retirement investments across different account types, including:
- Tax-advantaged accounts like IRAs and 401(k)s
- Tax-efficient investments in taxable accounts
- Accounts providing guaranteed income like annuities
Using a variety of account types can provide tax benefits, ensure money is available from both liquid and illiquid sources, and allow you to pursue an income-investing strategy with a diversified approach.
Diversify Further Within Each Asset Class
Within each asset class, it’s also important to diversify across:
- Different sectors Like technology, healthcare, utilities, etc. are vital sectors for a diversified portfolio of growth.
- Market capitalization levels of stocks
- Bond maturities and issuers
- Geographic regions and international exposure
Don’t overlook assets that can provide income like dividend-paying stocks, bonds, REITs, and money market funds. Income investments play a crucial role for retirees.
Review and Rebalance Regularly
As you withdraw money and investment values fluctuate, your actual asset allocation will shift over time. Be sure to review your portfolio positioning regularly and rebalance to maintain your target allocation.
This allows you to regain your proper risk/return profile and ensures your retirement portfolio stays aligned with your goals and needs.
Ways Your Investments Can Provide Income in Retirement
Turning your retirement savings into a steady paycheck is a key part of investing after you stop working. You’ll need to create reliable income streams from your portfolio.
There are several approaches and investment types ideal for this goal:
Bond Income and Portfolio “Buckets”
One method uses fixed-income investments like bonds as your primary income source. You’d keep these in a separate “bucket” or portion of your portfolio specifically dedicated to producing income.
As an example, you could invest a large portion in:
- Government bonds
- Investment-grade corporate bonds
- Bond mutual funds and ETFs
You then spend just the interest payments coming off this fixed income bucket each year for living expenses, preserving the principal investment.
The 4% Withdrawal Strategy
Another popular income approach is following the “4% rule” for withdrawals from your overall portfolio.
- You withdraw 4% of your total portfolio value annually for spending
- With expected investment growth, this allows funds to last 30+ years
- The 4% figure can be adjusted up or down based on your specific situation
This provides income from both interest/dividends and gradual selling of investment principal over time.
Dividend Stocks and Retirement Income Funds
To generate more income without eating into principal, many retirees utilize investments explicitly focused on paying dividends and distributions:
- Dividend-paying stocks
- Mutual funds and ETFs designated for retirement income investing
- REITS and other income-oriented assets
The dividends and fund payouts provide income while still leaving your investment principal intact, essential for investing in retirement.
Using Annuities for Lifetime Income
For guaranteed income no matter how long you live, annuities can be a powerful tool:
- You give the insurance company a lump sum of retirement money
- In exchange, they send you a monthly paycheck for life
- This ensures you never run out of income even if you live to 100+
Different types of annuities like SPIAs, DIAs, or QLACs can provide income while still accessing some of the principal if needed.
The key is implementing some combination of these income-generating strategies aligned with your retirement lifestyle, cash flow needs, tax situation, and investment timeline. Flexibility and diversification are important.
Smart Ways to Minimize Taxes on Your Retirement Income
Once you retire, taxes can take a serious bite out of your investment income if you’re not careful. Proper tax planning lets you keep more of what you’ve worked so hard to save.
Using Tax-Advantaged Accounts
One of the best ways to reduce taxes on retirement income is to make the most of accounts that provide tax benefits:
- Traditional IRAs and 401(k)s – Money grows tax-deferred until withdrawal
- Roth IRAs and Roth 401(k)s – Withdrawals in retirement are tax-free
These allow you to delay or eliminate taxes on investment earnings, stretching how far your income goes each year.
Asset Location for Tax Efficiency
Another strategy is strategically locating different investment types across your taxable and tax-advantaged accounts. This is called asset location.
For example, you may hold:
- Tax-efficient investments like ETFs and munis in taxable accounts
- Assets producing high taxable income in tax-deferred accounts
This maximizes your tax savings and keeps more money in your pocket over the long run.
| Investment Type | Better Account Type |
|---|---|
| Stock Funds | Tax-Deferred |
| Bonds | Tax-Deferred |
| Dividend Stocks | Taxable |
| Muni Bonds | Taxable |
Managing Required Minimum Distributions (RMDs)
Once you turn 72, you must take the Required minimum distributions and investment management tactics from tax-deferred retirement accounts like IRAs and 401(k)s. These withdrawals are taxed as ordinary income.
To avoid unnecessarily high tax bills, have a plan to take RMDs as efficiently as possible. This could involve strategies like:
- Taking RMDs from accounts with the lowest balances first
- Donating RMDs directly to charity to avoid taxes
- Doing Roth IRA conversions in low-income years
Tax-Savvy Withdrawal Strategies
The order and accounts you pull retirement income from each year can also make a big difference from a tax perspective. An effective withdrawal strategy is key.
For example, you may first draw from tax-free sources like Roth accounts. Then taxable accounts next, taking advantage of favorable long-term capital gains rates. Tax-deferred accounts would be last.
Or look at doing Roth conversions over time, paying some tax upfront in exchange for future tax-free withdrawals.
Calculating your overall taxable income each year is critical, as hitting higher tax brackets can defeat the purpose of these tax planning tactics.
The bottom line is being smart about maximizing the use of tax advantages and withdrawal sourcing can increase your effective retirement income by a meaningful amount over time.
Guarding Your Nest Egg From Major Threats
Even with careful planning, some big risks could derail your retirement investing strategy. It’s important to put safeguards in place against these potential pitfalls:
Longevity Risk – Running Out of Money
One of the biggest fears for retirees is outliving their retirement savings. After all, you could potentially need income for 25-30 years or more in retirement.
To protect against longevity risk:
- Invest part of your portfolio more aggressively for growth
- Factor in longer life expectancies when projecting costs
- Consider using income annuities for guaranteed lifetime payments
Sequencing Risk – Market Volatility
If you experience major investment losses early in retirement due to a market downturn, it can be devastating and deplete your funds faster than expected. This is called the sequence of returns risk.
Ways to mitigate this threat include:
- Holding enough cash/bonds to avoid selling stocks in a downturn
- Having a diversified portfolio across asset classes
- Adjusting withdrawals lower in volatile periods
Inflation Eroding Purchasing Power
Over 25-30 years, even relatively low inflation can seriously degrade your money in retirement income’s buying power. It would help if you had strategies to outpace rising costs:
- Invest part of your portfolio in inflation hedges like TIPS, real assets, etc.
- Choose investments that can provide **income** growth like dividend stocks
- Be prepared to adjust spending habits as needed
Using Annuities for Longevity Protection
For peace of mind insurance against outliving your assets, annuities can be useful retirement income tools.
With a fixed annuity:
- You give the insurance company a lump sum upfront
- In exchange, they provide steady monthly payments to you for life
- This provides guaranteed income no matter how long you live
Other annuity types like longevity annuities provide this insurance while still allowing access to remaining investment funds as needed.
The key is implementing an investing approach that can deliver the long-term income you require while also mitigating the major risks retirees face over that extended time horizon.
Having a smart, comprehensive plan protects your hard-earned nest egg from getting depleted too soon.
Getting an Expert’s Advice on Your Retirement Income Plan
For many retirees, the smartest move is to enlist the help of a qualified investment advisor or financial planner. Professionals can provide valuable expertise on:
- Setting up the ideal asset allocation for income investing
- Selecting specific income-producing investments
- Determining appropriate withdrawal rates
- Navigating complex tax laws impacting your retirement accounts
- Implementing risk management techniques like annuities
When Working With an Advisor Makes Sense
You may benefit most from professional guidance in situations like:
- You have a complex mix of income sources (Social Security, pension, etc.)
- Your investment portfolio exceeds $500,000 or more
- You’re unsure how to generate sufficient retirement income from savings
- You have complicated tax situations or estate planning needs
- You lack time or interest in managing finances alone
Even for a fee, having an experienced retirement income planner in your corner can pay off via optimized investing, tax savings, risk mitigation, and ultimately more money lasting longer.
What to Look For in an Advisor
When hiring a financial advisor for retirement planning, look for professionals who:
- Have certifications like CFP, RMA, CFA, or focus on retirement
- Are fiduciaries obligated to put your best interests first
- Have positive client reviews and a track record of experience
- Offer services like portfolio construction and monitoring
- Provide tax planning guidance, not just investments
For example, a Certified Financial Planner with 20+ years working with retirees could be an ideal choice to craft and manage your retirement income strategy.
Have an Open Discussion About the Needs
In your initial meetings, have candid discussions about factors like:
- Your retirement expenses and desired lifestyle
- Assets, income sources, tax situation
- Investment knowledge and hands-on involvement preferences
- Risk tolerance for volatility and legacy goals
- Costs and payment structure for the advisor’s services
The more context and details you provide upfront, the better your advisor can tailor an income investing plan customized to your unique circumstances and needs.
With professional support in place, you can gain peace of mind that your retirement income will be thoughtfully managed for decades to come while you enjoy your golden years.
Conclusion: The Path to Long-Term Cash Flow
As you can see, generating income from your investments is absolutely crucial once you bid farewell to the working world. With no more paychecks coming in, your retirement portfolio has to start providing the cash flow to fund your living expenses for what could be 25-30 years or longer.
The right income investing strategy allows you to create a regular income stream from your nest egg while still positioning your portfolio for continued growth to combat inflation and longevity risks. It’s all about striking that ideal balance between extracting money now and also ensuring it lasts.
The keys to successful retirement income planning covered here include:
- Understanding your specific income needs and cash flow requirements
- Building a properly diversified asset allocation combining stocks, bonds, and cash
- Implementing tactics like systematic withdrawals, bond ladders, dividend investing, and annuities
- Maximizing the use of tax-advantaged accounts and withdrawal sourcing
- Managing major risks like outliving savings, market volatility, and rising costs
- Knowing when to enlist the expertise of a qualified financial advisor
While it requires careful strategizing, the good news is there are many proven pathways for transforming your retirement savings into a reliable income for retirement that can last through your golden years.
The right moves today provide peace of mind that you can truly enjoy this new phase of life, the early years of retirement, without constant worries about running out of money. An investment plan designed expressly for generating future income is one of the smartest moves you can make once you reach your retirement age.
So take the time to assess your needs, understand your options, and put a sustainable income strategy in place. With proper planning, your diligent savings can continue compounding and paying you back for decades to come. Here’s to a retirement of financial freedom!