Key takeaways
- Consolidating multiple accounts can make it easier to manage investments and plan withdrawals.
- Take withdrawals to provide the income you need while minimizing the drain on your accounts.
- A diversified investment portfolio helps manage risk and may help to partially offset withdrawals.
- Earning income in retirement can give you more flexibility in managing your income stream.
Your retirement income will likely come from a variety of sources. But each income source falls within one of two main categories:
- Predictable Income—Your state pension is your main source of lifetime income. Some educators may also be eligible for Social Security. If you have an inheritance, this may be a known dollar amount as well. Each of these sources represents monthly income you can count on, but the age at which you retire can affect these sources. Delaying retirement by just one or two years could increase your pension and Social Security benefits.
- Variable Income—All other income sources fall under the variable category. Employer retirement plan accounts, such as 403(b) plans, IRAs, taxable savings and investment accounts, along with earned income will help to supplement your predictable sources. Since income from these sources may vary depending on investment returns and the percentage you withdraw each year, you must manage them carefully to make your money last as long as possible.
Here are a few tips on making the most of your variable income sources.
Consolidate multiple savings accounts
If you’ve worked for multiple school districts over the course of your career, you may have several 403(b) plans. Perhaps you’ve got a few traditional IRAs and maybe a Roth IRA. And then there are taxable brokerage and savings accounts. All of this money will be used to supplement your pension benefits and it’s up to you to invest it, manage it, and make it last.
Consider consolidating multiple accounts to simplify your money management decisions. This makes it easier to keep track of your investments so you can maintain an appropriate asset allocation—the percentage invested in stocks, bonds, and cash investments. It also may help you to stick with a disciplined withdrawal plan.
Be disciplined with your savings withdrawals
Some retirees try to live off the interest and dividend income from their investment accounts. This may work if you have substantial savings. But it may be more realistic to automatically reinvest those earnings and set up a program where you withdraw a certain percentage from the accounts each month. This type of disciplined withdrawal plan helps to keep your variable-sourced income consistent and, depending on investment returns, may allow your accounts to continue growing even as you’re taking money out.
Many financial experts suggest that you withdraw no more than 4% of your retirement savings in the first year of retirement. In the following years, you may be able to adjust this withdrawal percentage based on the rate of inflation, your investment returns, and your lifestyle needs. For instance, if a sharp stock market drop reduces your account value by 10% or more, you may want to cut back on withdrawals for a period of time, to give your accounts a chance to recover. This may take some lifestyle adjustments, but the idea is to be flexible in an effort to make your savings last as long as possible.
Keep your portfolio diversified to help manage risk
Keeping a percentage of your savings invested in stock funds and maintaining a well-diversified portfolio is another way to help sustain your accounts. Even though stock funds can be more volatile than bond funds or cash investments, stocks have shown greater potential for growth over long time periods. It’s smart to have this growth potential working for you because you may spend many years in retirement.*
Some experts suggest an asset allocation of roughly 50% stocks and 50% bonds for moderately conservative investors just entering retirement. The precise percentage you invest in stocks will depend on your tolerance for risk and your expected life span. But keep in mind that the low returns on so-called “safe” investments like Treasury bills may not keep up with inflation. And that could deplete your savings quicker.
Consider going back to work in retirement
Many retirees choose to work so they can remain engaged and intellectually challenged. Earning income from a part-time job can help close any retirement income gaps and perhaps allow you to be a little more conservative with your investment accounts. If you’re eligible for Social Security, earned income can reduce your benefits prior to your full retirement age (66-67 depending on your birth year). The Social Security Administration offers a booklet with details on how work affects your benefits.
Start planning income strategies before you retire
The suggestions above are starting points to get you thinking about different retirement income strategies. Consult with an NEA Retirement Specialist or other financial professional to determine an asset allocation strategy and withdrawal program that’s right for you. If you remain flexible in your retirement lifestyle expectations and keep a long-term outlook as you manage your investments, you’ll give yourself a good chance to maintain financial security throughout retirement. Perhaps you’ll even have something left over for your heirs!
*Diversification does not ensure a profit or protect against losses in declining market.
