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4 Ways to Create Retirement Income Once You Don't Have a Paycheck

Jun 23, 2017 5 min read George Mannes

Key Takeaways

  • The rule of thumb for retirement withdrawals is typically 4% a year.
  • Remember, when it comes to growth, the stock market can be your friend.
  • If you can wait until 70 to collect social security, wait until 70.

Like many older Americans, Saul and Sheila rely primarily on savings to fund their retirement. While they do collect Social Security and pensions — he taught in college and she in public schools — 55% of their spending comes from their workplace retirement accounts and individual retirement accounts (IRAs). 



Thanks to these funds, built up through a lifetime of work, Sheila and Saul (not their real names) can fund everything from weekly groceries to the European trip they took last summer to visit a niece and nephew in England.

Although Saul and Sheila are enjoying themselves, many people nearing retirement wonder whether they’ll feel so secure. In a survey of CPA financial planners conducted by the American Institute of CPAs opens in a new window last year, for example, 41% of CPAs who work with people planning for retirement said their clients’ top worry was whether they would run out of money. (Their next-biggest concern was closely related: whether they’d be able to maintain their current lifestyle and spending level.)

Nearing retirement? The good news is that there are steps you can take that may help boost the odds you’ll have a comfortable and sustainable stream of income in retirement.

Know your limits

Start by getting a realistic sense of how much money you can withdraw from your investment accounts each year. 

Advisors and academics have spent years debating this issue and refining their theories in a way that takes into account the impossibility of knowing how the economy and a specific portfolio will perform over an upcoming retirement. 

One general rule of thumb: If you have a portfolio that’s roughly split between stocks and bonds — say, anywhere from 60%/40% stocks/bonds to 40%/60% — if you draw out 4% of that amount the first year and adjust that withdrawal for inflation in the subsequent years, you have a pretty good chance of that money lasting for 30 years. So let’s say that you have a retirement savings of $1,000,000; that means you take out $40,000 your first year of retirement. Suppose inflation pushes up consumer prices 2% the following year 
(click to see the government’s latest calculation opens in a new window). 

Then the following year you would raise your withdrawal 2%, to $40,800.

Advisors say that’s typically a good starting point, though not the final word. If you expect a shorter retirement, you might withdraw more; if you’re retiring early, you might take less. And, in practice, it generally pays to adjust your spending in response to the performance of your portfolio and the economy. As Tim Maurer, director of planning for the BAM ALLIANCE puts it, “Wait for that year when you have outsized growth before you take the whole family to Disney.” More suggestions: 

Consider investing for growth

Retirees have traditionally turned to interest from bonds and certificates of deposit to fund their retirement, shunning stocks because they fear a market downturn. But relying on fixed income may not be sufficient, say planners—and not just because interest rates, under 2.3% for 10-year Treasury debt  as of early June 2017 opens in a new window , likely can’t sustain that 4% withdrawal rate. 

Retirees need to be concerned about the threat of inflation, says David Mendels, director of planning for Creative Financial Concepts. Should the U.S. experience a replay of the double-digit inflation spikes of the mid-1970s and early 1980s, a broad-based portfolio of stocks and bonds will likely do a better job than an all-bond portfolio of preserving your purchasing power. “It’s inflation that’s the killer, not the market downturn.”

That’s why, rather than seeking income solely from interest and dividends, many planners suggest focusing on total return from a portfolio which could include stocks and bonds. Stocks, while considered riskier than bonds, usually offer greater opportunity for growth; bonds, which generally have a lower total return than do stocks, usually have lower downside risk.

When you need spending money from your portfolio—or when you have to take out a required minimum distribution from a 401(k) or traditional IRA—you may want to start by selling investments that are overweight in your portfolio. If you have a 40%/60% stock-bond mix, for example, and your portfolio is now 63% bonds, it might be a good idea to sell bonds. Re-setting your portfolio back to your target mix while getting your money out is “killing two birds with one stone,” says Maurer. 

Help protect against the downside

Selling stocks or bonds during a steep decline in the market, especially in the early stages of retirement, could decimate a nest egg and threaten your standard of living later on. That’s why most advisers suggest having cash cushion in your portfolio: If there’s a replay of the market meltdown of a decade ago, you may not have to sell securities at distressed prices.

Mendels, for one, suggests his clients put five years’ worth of expenses in CDs. Victoria Fillet Konrad, a certified financial planner at Blueprint Financial Planning, offers a similar approach: Calculate which of your expenses are absolutely non-discretionary, such as taxes, insurance, and food; then add in “somewhat discretionary” expenses, like cable TV and dinners out. Add up two years of those expenses and keep the money in cash. “That can help take the pressure off of panicking in a down market,” she says. 

Maximize Social Security

For most Americans, Social Security retirement benefits, which you can start taking at age 62, are an important source of income. Based on your earnings record, those benefits provide income to you (and your surviving spouse) for life. Just as important, that income stream is adjusted annually for inflation opens in a new window, so your benefits rise to help keep pace with consumer prices.

If you aren’t compelled to take out Social Security to support yourself, you’re usually better off waiting to claim your benefits, especially if you’re married and are the higher earner in your household. For each year between ages 62 and 70 that you delay taking Social Security, your monthly benefits rise an impressive 7% to 8%. That could add up. Suppose, for example, someone turning age 62 in 2017 was due $2,000 a month if she collected benefits immediately. If she waited until her 70th birthday to collect, her monthly payment would be the inflation-adjusted equivalent of $3,500.

Many people take benefits early, figuring that they’ll have to wait years before larger monthly benefits, taken later, add up to the total they’d collect from smaller monthly payments taken starting years earlier.

But many advisers argue against that, especially for the higher earner of a married couple, since that person’s benefit will be the benefit for his spouse, should she survive him (wives typically earn less than their husbands, and outlive them). That higher monthly benefit could come in handy, since married couples at age 65 today, according to the Social Security Administration, have a 50% chance that one member of the couple will live beyond age 90. Says Fillet, “When you get to your 80s or 90s, that higher payment could be very important to you.” 


What you can do next

One way to help minimize taxes on your retirement income is to think strategically about where different securities are located in your various accounts, explains Maurer. 

For example, you may want to consider keeping some stocks and stock funds in taxable accounts because qualified dividends and profits on sales are taxed at capital gains rates. If those securities were in a 401(k) or traditional IRA, the withdrawals would likely be taxed at higher income rates. If you put bonds in those retirement accounts, it may help at tax time since interest is taxed at ordinary income rates. When developing a strategy to withdraw funds during retirement it is recommended that you speak to your tax professional regarding your specific circumstances.


Remember that investing involves risks, and some investments have more risks than others. Past performance does not guarantee future results, and an investment may not achieve its objectives. It is possible to lose money when investing. You should consider a variety of factors when determining an income stream for retirement. Please consult your tax and legal advisors regarding your particular circumstances.


George Mannes, a former editor at Money, has been writing about investing and personal finance since 1998.


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