Retirement Income Distribution Strategies

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During pre-retirement, most people are in saving mode. They’re putting away as much money as they can before leaving the workforce. Sitting down with financial advisors to develop an accumulation strategy is paramount. But that’s not the only financial strategy that should be devised.

Retirement income distribution should be part of the strategy. Taking funds out of those retirement accounts in a systematic manner is just as crucial as saving. There are a couple of ways to approach this. And you'll need to decide what strategy will work for your goals.

Income Distribution Planning

You'll need to make a mental shift when you develop a retirement wealth or income distribution plan. You’re no longer putting money away; you’re withdrawing it. This can be difficult for many people. There’s a fear that sets in concerning how much was saved and will it be enough.

It’s time to determine how these funds will be used for retirement. Withdrawing funds is a gradual move into retirement. And there needs to be a plan as to how much to withdraw. What accounts the funds come from is also important.

Lack of Income Distribution Risks

There are risk factors to not creating a distribution strategy. If you retire at 65, you may have up to 20 years to spend in retirement. Inflation can erode your retirement funds over the years. You need a strategy that overcomes inflation.

If you are invested in stocks, market volatility is also a factor. The market can create uncertainty, especially for retirees. A plan considers the impact of fluctuating markets.

But there are plans that can help overcome this.

Predictable Income Covers Daily Expenses

There are a few ways to manage your distribution income, and one is using income to cover expenses. Even though you’re not receiving a paycheck, the income can still be steady. There is predictable income from your investments.

This predictable income could come from:

• Social Security
• pension payments
• annuities
• interest income
• short-term bonds

These are stable sources of income that offer predictable income. Map out a plan to use these investments to pay for everyday necessities. These everyday expenses include food, utilities, housing, car loans, etc.

Then plan for your discretionary expenses. Discretionary expenses could be vacations, charitable donations, gifts, etc. These expenses should be paid for from different accounts than the predictable expenses. These discretionary expense accounts include:

• stock dividends
• distributions from mutual or exchange-traded funds
• proceeds from selling investments

Although these types of investments may be consistent, they are not guaranteed. Therefore, these shouldn’t be relied on for day-to-day expenses.

Rebalance Portfolio to Protect Cash Flow

Don’t forget to rebalance your portfolio. This is important to manage the more volatile investments like stocks. You'll be susceptible to more risk if your portfolio is not balanced. An unbalanced portfolio is never good at any age, but it’s riskier for a retiree who doesn’t have time to recover from a loss.

Talk to a financial advisor about how to keep your portfolio in balance.

Probability Approach an Option

The 4 percent rule is another approach to funding your retirement. It’s an easy concept. You combine all your investments into one amount and then subtract 4 percent in the first year of retirement.

Throughout your retirement years, the amount withdrawn is adjusted for inflation. The theory is that you will live an additional 30 years and not run out of money.

For example, if your retirement portfolio equals $1,000,000, you would take $40,000 in the first year of retirement. Then, if the cost of living rises, you would give yourself a raise based on that percentage. In this case, if the cost of living were 2 percent, the payment to yourself would be $40,800. This would go on for the duration of your retirement.

This is a rigid rule. It also assumes that instead of looking at how your portfolio performed, you would be spending according to your spending rate.

It also depends on how your portfolio is invested. For example, the 4 percent rule assumes you have 50 percent stocks and 50 percent bonds.

This theory assumes your portfolio will last 30 years. It also doesn’t consider taxes and investment fees. Some of that 4 percent will have to go toward taxes. That brings down your yearly distribution.

Create a Distribution Plan to Fund Retirement

It’s essential to create a sustainable retirement income distribution plan. Not having a plan can make or break your retirement.

For several decades, you'll need income to maintain your lifestyle. And with Social Security in the shape it’s in, your investments will need to pick up the slack.

Whether you choose the predictable plan or the probability approach, you'll need to be able to plan and have the financial confidence and peace of mind to take you through retirement.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.