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May 24, 2016

Growing Income in Retirement

Strategies to consider to generate income for life.

Bradford M.  Walker Senior Vice President

Bradford M. Walker, CFP®

Senior Vice President

Wintrust Investments

Vince Lombardi once said “We didn’t lose the game, we just ran out of time.”

Today’s retirees may say, “I saved and invested enough, I am just living too long.”

It is a challenging time to retire and generate lifetime income. The historically low yields on bonds and CDs, longer life expectancies, and the lack of pension income are all contributing to the greatest retirement challenge in history. All these factors are new and must be considered. The old rules of retirement do not necessarily apply.

The first step to planning should address your specific needs. Start by asking what retirement means to you. For some, it means travelling the globe and spoiling grandchildren, for others, it means part-time work, volunteering, and catching up on great books. However you define it, and whether it begins at 55 or 75, retirement is unique to everyone. Accordingly, generating retirement income is different for everyone.

Once a picture of what retirement looks like has been drawn, the next step is to determine how much retirement income will be needed. Of course, it depends on many factors, but the answer is often much higher than expected. Factors to consider in determining sufficient retirement income include: longevity and family health history; guaranteed and protected income; fixed income; rising and variable income; withdrawal rate; risk tolerance; tax consequences; and liquidity.

Another important consideration is inflation. In a rising-cost world, it is crucial to have a rising income stream. It is also important to note that, while overall inflation is currently mild, expenses for seniors have been rising faster than overall inflation. So-called ‘senior inflation’ primarily consists of food, utilities, and healthcare. Understanding how your expected living expenses in retirement will grow due to inflation is vital to ensuring sufficient income throughout retirement.

The next step after a desired level of retirement income is established is to determine the means by which that income is generated. In order to generate sufficient income, both asset allocation and product allocation must be carefully considered. Income could be derived from multiple sources which may include: Social Security, earnings, pensions, bonds and CDs, annuities, stocks, and real estate. Regardless of the source, income in retirement should be thought of in terms of three forms, all of which are needed: insured income, fixed income, and growing income.

Insured income comes from sources such as Social Security, pensions, and annuities, while fixed income is realized from investments such as CDs and bonds. Together, these two forms of income should ideally cover the majority of basic income needs. Growing income is typically derived from stocks and real estate. Often, retirees shy away from these more volatile investments, citing them as too risky. However, retirement income investing is different than investing during the accumulation phase and growing income is a key cog in a healthy and lasting retirement income stream.

The key to understanding why this is so rests in the way risk is viewed. What is considered risky during the wealth accumulation phase of life is not necessarily the same in the distribution phase. For example, since 2001, the income from 3-month Treasury bill dropped from about 5% to effectively zero today. On the other hand, since 1964, income from dividends derived from stocks in the S&P 500 has grown approximately 5% annually. The fact that stocks are volatile did not stop dividends from growing over time and this growth of income is crucial to maintaining purchasing power over today’s long life expectancies.

While working, income is predictable, coming in regularly each month. Retirement should be no different. If long-term, lifetime income is a concern, coordinate a meeting with a planning-focused Financial Advisor at Wintrust Wealth Management to explain, implement, and manage your retirement income strategy. 


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