Thursday, February 22, 2024

Managing retirement income - and needs

by Bill WaggonerSpecial to
| April 18, 2010 9:00 PM

Managing income in retirement can be challenging. For many, the total income in retirement is often less than it was during working years and some income usually has to come from investments that previously were allowed to grow untouched.

One strategy for dealing with this challenge is to create enough "lifetime income" to at least equal your "essential expenses" and use "managed income" from investments to cover your "discretionary expenses."

Lifetime income items would include money you will receive in retirement that is not subject to market fluctuations and will continue indefinitely. These would include Social Security, pensions and annuity payments. Essential expenses include amounts you need for food, housing costs, and fixed expenses such as loan or insurance payments.

Non-essential "discretionary" expenses, such as entertainment or travel, are paid for out of managed income that comes from investments such as stocks, bonds, and mutual funds. In analyzing your situation, you may find that some expenses, such as food and clothing, might have both an essential part and a discretionary part.

As I mentioned at the beginning, the goal of this strategy is to have enough lifetime income

to match or exceed your essential expenses. In doing so, you would then have peace of mind of knowing that even if your investments have a bad year you will have enough income to cover your basic expenses.

But what if your anticipated lifetime income doesn't cover your estimated essential expenses? One solution would be to move some of your investment money into a fixed or variable annuity that could provide additional lifetime income. Many variable annuities now provide what are called "living benefits" that make a distribution over the lives of one or two people (e.g., husband and wife) regardless of how the underlying investments perform. With good performance, the amount paid can actually increase.

A cash and savings reserve equal to two years of non-essential expenses is also recommended. The remainder of investments that generate managed income should be invested conservatively and divided between equity and fixed income securities. A 60-40 or 50-50 percent allocation is often recommended.

Earnings from fixed income investments are used to replenish the cash reserve. In good years when the investments do well, you can take extra gains from them and use those gains to replace money taken from the fixed income securities. In not-so-good years, you can leave the equity investments alone, knowing that you have both a cash reserve and fixed income securities to keep you going until the equity securities recover.

There are a number of different strategies for determining how much and when to move money from equities to fixed income to cash reserve. Some are quite sophisticated and take constant management. Others only require annual rebalancing. Everyone's situation is different and sometimes a combination of methods needs to be used.

Bill Waggoner is a Certified Financial Planner and is a vice president and financial consultant for D.A. Davidson & Co.