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It can be incredibly difficult to know where to start when it comes to planning your retirement. This is especially true if you’ve worked diligently to save up a large nest egg. After all, more capital means that you have more options when it comes to potential retirement income strategies.
While this is a good problem to have, it can also make navigating retirement a bit more confusing.
To help out, this article will break down the nine most common retirement income strategies that you can use to fund your golden years.
Dividend Retirement Income Strategy
How it works: Receive dividends from a portfolio of stocks.
This strategy is best for: Retirees who want to receive mainly passive income that’s tied to the stock market.
A dividend income strategy is when an investor builds up a portfolio of stocks that pay dividends consistently. If you’re not familiar, a dividend is just a distribution of profits by a company to its shareholders.
For example, let’s say that you invest in a company that’s known for paying dividends such as the consumer-packaged goods company Proctor & Gamble (P&G). P&G pays out a quarterly dividend of roughly $0.94 cents per share. This means that you will receive $0.94 cents each quarter for each share of P&G that you own.
If you invest $100,000 then you can afford approximately 694 shares and will receive $652.39 quarterly or $2,608 yearly.
If you invest $500,000 then you can afford approximately 3472 shares and will receive $3,263 quarterly or $13,055 yearly.
If you invest $1,000,000 then you can afford approximately 6944 shares and will receive $6,527 quarterly or $26,111 yearly.
By routinely receiving dividends, you can ensure that you have consistent cash coming in to help fund your retirement.
Next Steps: Falling portfolio values can be stressful. We recommend speaking with a financial advisor. This tool will connect you with a fiduciary financial advisor at Covenant Wealth Advisors with over 15 years of experience.
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Answer these few easy questions, so we can understand your situation.
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Pros of Dividend Investing:
It’s passive: Once you’ve set up your portfolio, all you have to do is sit back and collect your dividend payments.
It’s consistent: Many companies have paid the same dividend schedule for decades. For example, P&G has paid dividends for 133 years including 67 years of dividend increases.
Cons of Dividend Investing:
Your net worth will fluctuate: When you buy dividend stocks then your net worth will fluctuate along with the price of those stocks. If a dividend stock’s price dips then it could lower your net worth and effectively offset your income from the dividend payments.
Low returns: Dividend payments are known for being reliable and consistent. But, they usually don’t offer very high returns on your cash.
Total Return Approach
How it works: Create a blended portfolio with stocks, bonds, and cash that offers income, growth potential, and liquidity.
This strategy is best for: Retirees who want a combination of income and growth but also need quick access to their cash.
The total return approach attempts to craft a diversified portfolio that offers income, growth potential, and liquidity. Ideally, this portfolio will help you generate income while still growing at a satisfactory pace year over year. To achieve this goal, the portfolio is a blend of stocks, bonds, and cash or similar short-term investments.
Stocks: This asset offers growth and dividend payments.
Bonds: This asset offers income through fixed coupon payments and stability if the stock market falls.
Cash: Offer stability and liquidity if you need access to your money quickly.
Crafting a total return approach is a bit more nuanced than other strategies because it depends on your financial goals, expenses, and investable assets. If you’re interested in learning more about this approach then please reach out to our team directly to learn more.
Pros of the Total Return Approach:
Maximizes your assets: This strategy seeks to make the most of your assets to help you reach your financial goals.
Cons of the total return approach:
Can be more complicated than other strategies: This strategy usually requires a very thoughtful approach to ensure that you’re invested in the assets that are best for you.
Single Premium Immediate Annuities
How it works: Buy a single premium immediate annuity and start receiving payments instantly.
This strategy is best for: Retirees that want to lock in a guaranteed income stream.
A single premium immediate annuity (SPIA) is when you make a single large deposit with an annuity company and start receiving monthly payments immediately. The payments typically last for the rest of your life, similar to a pension or Social Security payments.
SPIAs are flexible and allow you to determine how frequently you want to receive your payments. For example, you opt for monthly payments over the next twenty years or payments that last for the rest of your life. As a general rule of thumb, the longer the time period, the lower the monthly payments will be.
Pros of Single Premium Immediate Annuities:
Receive payments immediately: You start receiving payments instantly and these payments will be guaranteed for the length of the contract.
Simple planning: This strategy offers an easy way to create income during your golden years.
Cons of Single Premium Immediate Annuities:
Lack of liquidity: Most of the time, you will not be able to access your nest egg once you use it to purchase an SPIA.
Risk of losing purchasing power: The payment that you receive from your annuity might seem satisfactory today. But, this income stream might not be enough after a decade or two of inflation.
Guyton-Klinger Guardrails Income Strategy
How it works: This take on the 4% withdrawal rule sets guardrails on how much you should withdraw each year.
This strategy is best for: Retirees who are nervous about running low on cash during their retirement.
The Guyton-Klinger guardrails income strategy is a stock-market-based retirement strategy where you change your withdrawal rate each year based on the performance of the stock market. It builds off the 4% withdrawal rule but helps protect against withdrawing too much cash from your account.
With this strategy, you set withdrawal “guardrails” that are 20% above and below your preferred withdrawal rate. These guardrails account for fluctuations in the value of your portfolio. If the stock market goes down then you’ll end up withdrawing less cash. But, if the stock market surges then you can go ahead and withdraw a bit extra.
Pros of Guyton-Klinger Guardrails Income Strategy:
Protects you from overdrawing from your account: This strategy can help prevent you from running out of money during retirement.
Keeps your spending realistic: The stock market is constantly fluctuating and it’s a good idea to keep your withdrawal rate consistent with the market’s performance. In bad years, you’ll have to spend less. But, during good years, you’ll be able to spend more.
Cons of Guyton-Klinger Guardrails Income Strategy:
Can result in decreased spending: If the value of your portfolio falls then you will need to decrease your spending accordingly.
Bucket Income Strategy
How it works: Invest your cash into three “buckets” to address short, medium, and long-term expenses.
This strategy is best for: Retirees who like a simple approach to retirement planning and want to ensure that their expenses are covered.
Next Steps: Falling portfolio values can be stressful. We recommend speaking with a financial advisor. This tool will connect you with a fiduciary financial advisor at Covenant Wealth Advisors with over 15 years of experience.
Here's how it works:
Answer these few easy questions, so we can understand your situation.
Schedule a call with a credentialed financial advisor who can help you on the path toward achieving your financial goals. It only takes a few minutes.
Check out the advisors' profile and have an introductory call on the phone or introduction in person, and choose who to work with in the future.
The bucket income strategy is a strategy that involves separating your nest egg into three different investments (or “buckets”) that all address different goals. The goal is to have one bucket each for short-term goals, medium-term goals, and long-term goals.
The short-term bucket: These investments are meant to cover short-term expenses and include cash, CDs, T-bills, savings accounts, and other similar short-term investments.
The medium-term bucket: These investments are meant to cover medium-term expenses (between 3-10 years) and include longer-maturity bonds and CDs, convertible bonds, growth and income funds, utility stocks, and REITs. This bucket is intended to grow on par with inflation while also avoiding risky investments.
The long-term bucket: These investments are meant to grow at a pace faster than inflation to keep your net worth rising over the years. These investments include a diversified portfolio of stocks or similar assets.
As far as retirement income strategies go, this is one of the easiest ways to invest your cash and be prepared for all scenarios.
Pros of the Bucket Income Strategy:
Covers all your bases: With this strategy, you know that all of your expenses (short, medium, and long) will be covered.
Gives you peace of mind: You don’t have to worry about stock market fluctuations because your short and medium “buckets” are not tied to stock market investments.
Cons of the Bucket Income Strategy:
Can be difficult to set up: It’s difficult to determine exactly how much cash to allocate for each bucket. There’s also the risk that you will misallocate and find yourself short of cash.
Conservative approach: This strategy allocates ⅔ of your net worth to fairly low-performing assets. This helps keep your cash safe. But, it can also lead to an underperforming portfolio over the long term.
Systematic Withdrawal Strategy
How it works: Make withdrawals from an account strategically.
This strategy is best for: Retirees who don’t want to get locked into a set payment schedule.
A systematic withdrawal strategy is when you choose to withdraw funds from an account until that account is empty. This strategy is mainly used with annuities, although it can work with mutual funds and brokerage accounts as well. Following this strategy can help you fund your retirement without locking you into a set payment plan.
Pros of Systematic Withdrawals:
Tax advantages: Due to the flexibility of the withdrawals, retirees can reap benefits during tax season.
Access to capital: Unlike an annuity, which uses pre-determined lifelong payments, the retiree gets much more flexible access to their capital. If they want to withdraw it much more quickly then they are able to do so. The funds could even be accessed in case of emergency.
Cons of Systematic Withdrawals:
Payments are limited: Unlike annuities, which offer lifelong payments, payments will only be available until the funds run out.
Laddered Bond Portfolio
How it works: Buy bonds with varying maturities.
This strategy is best for: Retirees who want to enjoy consistent income in retirement.
A laddered bond portfolio is a portfolio consisting of bonds with varying maturity dates. For example, you could invest your cash across a range of bonds with expiration dates of 2, 4, 6, 8, and 10 years. Then, as your earliest bonds expire, you can choose whether to buy more bonds or invest the money elsewhere.
Next Steps: Falling portfolio values can be stressful. We recommend speaking with a financial advisor. This tool will connect you with a fiduciary financial advisor at Covenant Wealth Advisors with over 15 years of experience.
Here's how it works:
Answer these few easy questions, so we can understand your situation.
Schedule a call with a credentialed financial advisor who can help you on the path toward achieving your financial goals. It only takes a few minutes.
Check out the advisors' profile and have an introductory call on the phone or introduction in person, and choose who to work with in the future.
“Laddering” your bonds this way helps you lock in long-term returns while also getting short-term access to your cash. This is advantageous because the economy is constantly changing and you might not necessarily want to have all your money locked into bonds for the long term.
Pros of a Laddered Bond Portfolio:
Creates predictable income: By staggering the maturities, you know that you have money coming in over the next few months/years (as opposed to having a large portfolio of bonds that all expire at the same time).
Reduces exposure to stocks: This strategy can generate consistent income with minimal volatility.
Cons of a Laddered Bond Portfolio:
Lower returns: Like most fixed-rate investments whose interest and principal are guaranteed, a bond ladder is likely to underperform stock-based investments over the long run.
Maximizing Social Security Benefits
How it works: Delay your Social Security benefits to increase your payments.
This strategy is best for: Retirees who are not in a hurry to collect Social Security and would rather receive larger payments in the future.
You can maximize your Social Security benefits by not collecting your benefits until you are 66, as opposed to 62. You can legally retire at 62. But, your benefits will be reduced by 25% to 30%. On the other hand, if you wait until you are 66 then you will be able to collect the full benefit. If you want, you can wait even longer and become eligible for delayed retirement credits that increase your monthly payments.
According to Investopedia, eight other strategies to maximize your social security benefits include:
Working for 35 years
Waiting until at least full retirement age to start collecting
Collecting spousal benefits
Receiving dependent benefits
Keeping track of your earnings
Watching out for tax-bracket creep if you’re still working
Applying for survivor benefits
Checking your Social Security statement for mistakes
Stop collecting benefits temporarily
Pros of Maximizing Social Security Benefits:
Higher payments: By waiting until you are 66 or older will make you eligible for a higher payment.
Cons of Maximizing Social Security Benefits:
Opportunity cost: While you will ultimately receive higher payments, you’ll also have to go years without this income source. This means you won’t be able to spend or invest your Social Security checks for four years while you wait to reach full retirement age.
Buying a Cash-Flowing Business
How it works: Buy a business that’s already profitable.
This strategy is best for: Retirees who are looking to stay busy during their retirement while also generating a return.
For many retirees or near-retirees, the thought of starting a new business from scratch might seem laughably unrealistic. But, what about buying a business that’s already profitable?
Companies like BizBuySell can help you find local small businesses for sale in your area that are already cashflow positive. If you have $1 million in investable assets then there are plenty of businesses that you can afford to purchase. By buying a business, you can secure an income stream that has the potential to be scaled upward.
A few examples of common business for sale on BizBuySell include:
Renovation companies
Franchises
Restaurants/bars
Hairstylists
Consumer goods companies
Pros of Buying a Cash-Flowing Business:
Scaleable income: Businesses can be improved over time and can provide a much higher return than other assets.
Tangible asset: For retirees who don’t want to be confined to the golf course, owning a small business can help you stay involved in your community while also generating a positive impact on your neighborhood.
Cons of Buying a Cash-Flowing Business:
Lots of work: Owning a business, regardless of its size, requires lots of work.
High risk: The business world is highly competitive. It’s possible that you could get run out of business and lose your entire investment.
We hope that you’ve found this article valuable when it comes to learning about nine retirement income strategies that you can use to generate cash flow in your retirement. With that said, planning for retirement is a challenge that requires a high level of personalization as everyone has different assets, expenses, and life goals.
If you’re interested in learning more about retirement planning, please contact the Covenant Wealth Advisors team.
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Author: Mark Fonville, CFP®
Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money.
Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.
Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.
Registration of an investment advisor does not imply a certain level of skill or training.