Clients often ask me this question. Less and less Americans still have a pension check coming in. Thus, they need to focus on Social Security benefits and finding prudent ways to tap their assets in retirement. I have detailed below some of the different ways that people handle their day to day cash flow in retirement:

 

Bucket Approach- Many people choose to set aside a “bucket” of money in a savings account that has enough money in it to cover one to two years worth of expenses.  Then, you withdraw from that fund a monthly stipend in order to cover your cash flow expenses.  Under this approach, people have traditionally taken out a withdrawal equal to 4% of their portfolio value. The assumption is that the portfolio over time would return them that much or more.  Given that we are in a fragile economic time, it would be more prudent to take a lower distribution. Perhaps a 3% distribution might be more appropriate (at least until the economy gets better).

 

Payout the Interest and Dividends- You can have all of your funds payout the dividends and/or interest that they earn. The advantage of this is that you do not need to dip into the principal. However, it does not allow you to diversify your portfolio because all of your money needs to be invested in income producing investments.

 

Immediate Annuity- Immediate Annuities offer a way to create a private pension plan similar to what you would receive if you had a pension from an employer. The advantage this offers is that it gives you a stable monthly check for a certain time period or for lifetime. The disadvantages are that it is an irrevocable decision and does not help you plan for inflation.

 

Variable Annuity with Guaranteed Payout- I mentioned that many people have chosen to use variable annuities with a guaranteed principal rider. I am not a big fan of this option because of the high overall fees you would pay each year.

 

Combination Plan- A third approach would be a combination of the first two approaches. Annuities or CDs would be used for the beginning part of your retirement, followed by dipping into the principal of your bond allocation and eventually dipping into your stock allocation later in retirement. Many people have chosen to not go for the annuity approach because it's an irrevocable decision.  However, it does help with the volatility.

 

There is no perfect answer. Everyone’s goals, time horizon and financial circumstances are different. If you would like to discuss this further just give me a call at 201-843-0044.