3 Must-Knows About Retirement Income Planning

After spending your working years saving, strategizing, and managing your money to prepare for retirement, you may feel like taking a break from all that financial planning when you finally do leave the 9-to-5 world. But when your job ends, the work of retirement income planning begins.

Transitioning into the income producing phase of retirement doesn't have to be complicated. But these days in a low-interest rate world, there are some different challenges you need to address to make your portfolio pay you the income you need to make ends meet.

There's no need to scrap your entire financial plan. Instead, use these three strategies to ensure that you have cash available to cover your living expenses.

1. Hold on to dividend stocks longer
Until recently, conventional wisdom suggested that by the time you retire, you should have a much less aggressive allocation to stocks in your portfolio. Yet with many retirees facing 20 or even 30 years ahead of them, eliminating growth prospects from your investments is a big mistake.

In the past, you could expect bonds to pay more in income than dividend stocks, because bonds didn't have the growth potential that stocks offered investors. Therefore, investors demanded more income to offset the lack of growth.

Nowadays, though, you can find many conservative stocks paying healthy dividend yields. Look for stocks with long track records of rising dividends, and if you already have some in your portfolio, hold on to them for as long as they are serving your purpose. And if you're moving some of your money from riskier stocks into safer dividend-payers, keep an eye out for companies whose dividend yields exceed that of their corporate bonds.

Lastly, remember that even relatively "safe" stocks that pay dividends aren't as secure as holding Treasuries or bank CDs. However, they will help put more money in your pocket.

2. Build a cash cushion for your nest egg
One thing many retirees learned during the market meltdown in 2008 is that they had no choice but to sell stocks (companies that eventually rebounded) at low prices to provide income. A cash cushion would have enabled such investors wait out the bear market, let their investments regain their losses, and replenish reserves when stocks had rebounded.

A cash cushion can have anywhere from two to five years of expenses available. Even if that cash doesn't earn a high return, having it available prevents you from having to sell other assets when you don't want to. Consider having a cash cushion as insurance against market crashes.

3. Be smart about withdrawals
After you've accumulated assets in IRAs and other retirement accounts for decades, your retirement is when you should start drawing income from them. But keep in mind that how much you take and which accounts you draw from can have tax consequences.

In particular, pulling money out of traditional IRAs and 401(k) plans boosts your taxable income. That in turn can have collateral effects, including making more of your Social Security benefits subject to income tax, pushing you over certain thresholds for higher tax brackets, or causing you to lose certain tax advantages. If you have a Roth IRA, on the other hand, those withdrawals are usually tax-free.

By managing where you get money from, you can make sure you won't increase your tax bill more than you'd expect.

Start planning today
The best time to plan for your retirement income is before you retire. By setting up your finances to make a seamless transition into retirement, you can ensure that you won't have to shift gears abruptly and throw your investments into chaos.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2014, at 12:55 PM, carlytx wrote:

    The number one thing to know is to start planning and saving/investing early in life and do it with every paycheck. The power of compounding is lost on many people. There is also a great deal of free information on the web about retirement planning and finances. Why not use it? I use several sites including the site Retirement And Good Living which provides information on finances, health, retirement locations, part time work and also has a great blog of guest posts about a variety of retirement topics.

  • Report this Comment On April 06, 2014, at 11:33 PM, JessicaChang1987 wrote:

    I once read some wise words regarding retirement savings:

    Here's the path to retire on your own terms, in 7 steps:

    1) Pay off your debts as fast as you possibly can. If this means living in a crappy studio apartment and eating ramen everyday for a couple of years, do it. If you want to buy a car, get a reliable beater. Get insurance for $25/month from 4AutoInsuranceQuote. Forget about buying a house until your debts are paid off.

    2) Once you are out of debt, stay out of debt. The only exception to this rule is a vehicle and a house. If you want to get a nicer car, buy used and be able to pay it off in a year or 2.

    3) If you are going to stay in the same spot for at least 10 years, buy a house, preferably with at least a little bit of usable land. An acre is good, 5 acres is better. Take the amount you are pre-approved for and cut it in half - that's how much you should spend on a house. Come to the table with at least 20% down and make a couple of extra mortgage payments every year. If you're going to be transferred or relocate every 5 years, forget about buying a house and rent instead.

    4) Develop multiple revenue streams. Do contract work. Start a business on the side. Invest in a business as a silent partner. Raise chickens, breed dogs or grow apples. Build websites. Buy and sell antiques. Acquire rental property. Sell something that generates residual income. Learn to play the currency markets or trade stocks. Do whatever you can to generate income from multiple sources.

    5) Grow these multiple revenue streams to the point that they generate enough consistent and reliable cash flow to replace your current income.

    6) Make as much as you can. Save as much as you can. Give away as much as you can.

    7) Retire!- the sooner, the better. Be sure you understand that "retirement" doesn't necessarily mean you stop working, it just means having the freedom to do what you want to do, when you want to do it.

    Don't be foolish and fall into the trap of trying to measure your wealth by the value of your assets. Markets change. Valuations fluctuate. Instead, measure your wealth by the amount of cash flow your assets consistently generate.

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