The Diversified Income Stream Approach, Turning Financial Assets into Retirement Income
Are you ready to transition from your working years into retirement but don’t know how? After receiving a paycheck for so many years, many clients don’t know how to plan for retirement. Now that the time has arrived, what are some of the best ways to make sure you have enough money to plan correctly? Let’s explore a diversified income stream approach, and how each income stream works together to satisfy your retirement income needs.
The first stream comes from your checking/savings account. In the US, the current yield on a high-yield savings account is around 1%. This income stream will need to cover 6 to 12 months of expenses to cover your daily liquidity needs. With interest rates on these accounts at historic lows, you will need to generate income from other sources to fully fund your retirement needs.
The second stream consists of income and dividends being generated by your investment portfolio. This could consist of dividends generated from stocks, bonds, real estate, or any other means of income generation that you may have. This income should be fairly predictable, and will be funneled directly into your checking/saving account (your first income stream). This stream is less liquid and allows growth of your assets to keep pace with inflation which guards against diminishing purchasing power in the future. Upon retirement, depending on your situation, you should plan to start taking strategic, tax sensitive withdrawals of around 2-4% per year based on your spending needs. In my experience, it is best to follow a systematic withdrawal strategy and stick to it. Creating a plan can help prevent you from overspending and depleting investment assets at an unsustainable rate.
The final stream is guaranteed lifetime income. The income generated from this will feed right back into the first stream. Guaranteed income includes receiving a company pension, purchasing an annuity from an insurance company and taking income, and drawing from Social Security. This income will be very predictable and guaranteed for life. When deciding whether to take the company pension or lump sum, I would recommend talking to a financial professional. There are often many different options to choose from, and the elections are generally irreversible.
In summary, the main stream of income for managing expenses: cash held in a bank checking or saving account, dividends and income generation from investment portfolio, and guaranteed income sources such as pension, annuity, and Social Security. Done correctly, a diversified income stream approach can simplify retirement by creating a managed, methodical system.