Determining an appropriate strategy for converting assets into income is a crucial piece to any retirement plan. An income strategy should not only provide a regular stream of income but should do it tax-efficiently for as long as required. A successful plan requires a comprehensive analysis to come up with appropriate strategies best suited to sustain spending power through retirement. While no one strategy is right for everyone or better than others, each strategy should be tailored to the needs and challenges of each person. For example, converting a 401(k) account into a life annuity can be an excellent solution for someone with little other guaranteed lifetime income, but less so for someone with a significant pension benefit.
A starting point for converting assets to income begins with choosing the appropriate way to frame the issue. For some, it's more helpful to think in terms of creating an income floor for essential expenses. And for others, it starts with the question, “How much can I afford to withdraw from the portfolio each year and still make my money last?” Whatever approach is taken, it's important to be familiar with the different ways of framing the issue and be able to pick solutions appropriate for your situation.
Once the strategy is framed, you can begin to build out the details about how it will meet your income goals while managing the risks facing those goals.
To bring your retirement income strategy into focus, here are a few questions to consider:
Do you prefer income stability or wealth accumulation?
Do you prefer a constant or fluctuating rate of spending?
Are you comfortable spending from a volatile investment portfolio?
Do you know how much you spend each year without running out of money?
Is outliving money in retirement a concern?
How do you plan to fund a longer than expected life?
The wealth accumulation side of retirement planning (saving for retirement) gets most of the attention. That's unfortunate because income planning (spending in retirement) is arguably the more complicated and important part of retirement. Very few save and invest for the fun of it. They do these things because someday they hope to have done them well enough to be able to comfortably retire. Whether this goal is achieved begins with having a well-thought-out strategy for converting assets into enduring income.
Is your strategy for converting assets to income up to the task?