A 25-year old median earner in 1981 that contributed regularly to their retirement would have about $364,000 by age 60, but unfortunately, the typical 60-year old has less than $100,000 saved for retirement. While $100,000 is enough to sustain someone for a few years, it’s not enough for retirement.
The good news is that there are some ways to stretch your retirement dollars. Smart cash flow management can reduce the amount that you need during retirement, while generating an income from your investments—rather than drawing them down—can extend their lifetime value.
Let’s take a look at how to create a retirement paycheck with your investments.
Cover Your Costs
The first step in creating a retirement paycheck is calculating your cash flow requirements and existing retirement income from Social Security and pensions. With these two numbers, you can calculate how much additional income you require in order to support your retirement needs.
You should aim to have your fixed expenses in retirement, such as rent, mortgage and healthcare premiums covered by guaranteed income, such as Social Security or pension income. That way, you don’t have to worry about the impact of stock market fluctuations on your ability to comfortably live.
Calculate Your Requirements
The easiest way to estimate your cash flow requirements during retirement is by looking at your existing budget. Pay especially close attention to your largest fixed expenses, such as healthcare premiums or mortgage payments, since they have the biggest impact on your cash flow in retirement.
Common expenses include:
- Rent or Mortgage
- Healthcare Costs
- Household Goods
- Travel and Leisure
If you don’t have a budget, you should consider starting one in advance of retirement to keep your spending on track. There are many different budgeting strategies, ranging from envelope budgets to assigning every dollar a job, while new software makes it easy to import your bank transactions.
You should also be sure to include new expenses during retirement. For instance, you may pay more in healthcare premiums in Medicare than you did with your employer or your mortgage expense might go away once you’ve paid off your mortgage if you only have a couple years left on it.
Pay with Guaranteed Income
Social Security is the most common form of guaranteed retirement income. While you can take benefits at age 62, you can maximize your benefit amount by delaying until age 70. The AARP provides a free calculator to see the differences between these amounts and help you make the best decision.
If you don’t have enough Social Security or pension income to cover your fixed costs, you may want to consider either reducing your fixed costs—by using a reverse mortgage to eliminate your monthly mortgage requirements, for example—or purchasing an income annuity or other guaranteed income.
Income vs. Withdrawals
The second step in creating a retirement paycheck is determining how much to withdraw from your retirement savings. While you should have your fixed expenses already covered, these funds can help you enjoy your retirement years with a better quality of life.
If you don’t have enough guaranteed income, these withdrawals could also be required to meet your fixed expenses. You should carefully ensure that you aren’t too aggressive in drawing down your retirement accounts if that’s the case since there’s a high cost to running out of money.
Many financial planners recommend The 4% Rule to avoid running out of money in retirement. Under this system, you withdraw 4% of your portfolio in the first year and adjust any future withdrawals based on the rate of inflation. Historically, the strategy has a low probability of depleting the portfolio.
While these strategies have worked in the past, low interest rates and high stock valuations could make them riskier in today’s environment. You may also want to retain as much of your portfolio’s value as possible as a rainy day fund or to pass on to your heirs upon your death.
Income investments are another option to generate cash flow without actually spending principal. Instead, these strategies rely on interest payments, dividends and other cash flow, like option premiums, to generate an income, while leaving the principal amount untouched.
There are many different types of income investments:
- Bonds & Preferred Stock – These investments pay monthly, quarterly or annual interest payments. They are also safer than equities since they have a liquidity preference.
- Dividend Stocks, REITs & (X)LPs – These investments pay a portion of their earnings out to shareholders on a regular basis as a dividend or distribution.
- Covered Call Options – These investments involve selling the right to purchase stock that you own at a higher price, generating an immediate income and reducing risk.
The Snider Investment Method is a long-term strategy designed to create income from your portfolio and ensure cash flow in retirement. Using a combination of stocks, options and cash, along with specific techniques applied in a specific sequence, you can maximize your portfolio’s income potential.
The Bottom Line
Many Americans don’t have enough money saved for retirement, but there are some ways to stretch each dollar. Income investments can play a key role in generating income during retirement without drawing down principal amounts. That way, you always have a safety cushion for the future and can generate an income throughout retirement.
The Snider Investment Method provides an alternative to conventional fixed income investments that may have limited upside potential. Using covered call options, you can maintain a portfolio of high quality stocks (and continue to realize some of their upside capital gains potential) while still generating a regular income.