Investing and planning for income in retirement

Your strategy may include some income-producing investments, but don't ignore other retirement income sources.

One of the biggest hurdles that people face when they transition from saving for retirement to living in retirement is how to convert their investments and savings into income. After all, once you retire, you lose that regular paycheck. So you’ll need to adapt accordingly, depending on other sources of steady income.

Following conventional wisdom, you could put your money into the safest investments possible once you retire. But as retirements last longer, it may be necessary to think about how to produce even more income. Those who reach age 65 today can expect to live about 20 more years, on average.1

"Longevity is a really big issue," says Dan Keady, CFP ®, Chief Planning Strategist at TIAA. "It's easy for people to underestimate how long they might live. And retirees face increased healthcare costs and long-term-care costs that have the potential to really deplete their portfolios."

Traditional 'safe' spots offer little yield

The safest types of income sources include federally insured savings accounts. But they aren't going to produce much income, notes John Canally, CFA®, Chief Portfolio Strategist at TIAA. "Interest rates are at essentially zero. You're probably not going to see a significant increase in interest rates on savings accounts until at least the end of 2022 or even into 2023 or 2024 because the Federal Reserve wants to keep interest rates low to make sure everyone can participate in the economic recovery."

Yields down, volatility up

More thoughtful portfolio construction may be required as yields have dropped.


That means retirees need to work with their financial advisors to determine smart ways to structure their retirement income and potentially consider other sources. Some of the investment options that may create income include dividend-paying stocks and bonds. But even here, there are challenges. Canally notes that yields on bonds are currently very low unless investors are willing to look at bonds that carry a higher level of risk.

"And people, in general, don't want to take a whole lot of risk in their income-generating investments," he says. Regarding dividend-paying stocks, "in the past 5 to 10 years, companies have moved away from increasing their dividends and have instead done share buybacks," he notes.

With the coronavirus pandemic still impacting the economy, Canally expects above-average market volatility until the bulk of the population is vaccinated and things return to a more normal state. While the recent events don't change market fundamentals, volatility, combined with potentially higher taxes for some under the Biden administration, may make it a good opportunity to talk to your advisor about your investment strategy and tax exposure.

Canally also warns investors about promises of yields that may seem too good to be true. In most instances, those types of investments are associated with a very high risk.

That's not to say there aren't options to produce income through your investments. Your financial advisor may be able to help you set up a portfolio designed to generate income while still managing your risk. It might balance certain types of high-yield bonds with some that have a lower risk, for example.

Look beyond your investments for income

Keady says that a smart income strategy goes well beyond your investments, however. In fact, income-producing investments are likely to be a relatively small component of your overall income. He suggests that those approaching retirement start by talking to their advisor about their strategy for claiming Social Security, which often makes up a significant part of a retiree's income.

"One of the best ways to increase your income is to delay claiming your Social Security," he says. "For each year you can wait (until age 70) you get an 8% increase on your benefits. You can't get that in most investments."

Sources of retirement income

Retirement income

Source: Nuveen

Other options for guaranteed income include annuities. And don't forget you'll be drawing income from your retirement accounts, especially once you reach age 72 and have to start taking Required Minimum Distributions. Keady says that even retirees should have an emergency fund because that money could eventually be a source of guaranteed income. That way, if you do need extra cash, you may not have to sell assets.

"From a financial planning standpoint, what you want to do is work with your advisor to look at all your sources of income," Keady says. "It's a common mistake to think of income as just interest and dividends. Financial planning creates that holistic look across all your potential sources of income as well as the amount of risk."

TIAA advisors use an asset location worksheet for each of your accounts to help you understand everything from how well-balanced your account is to its tax implications.

"They have the tools to look at all of these factors," Keady says. "Where an advisor can really help is by putting all your information together on one page and provide simulations to see what you'll have depending on certain scenarios."

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