Creating Income in Retirement

If you are preparing for retirement, one of the largest adjustments that you will face is that your regular paycheck will stop, causing you to rely on other income sources. While you will not being paid from your employer, you will have the opportunity to create your own paycheck from investments. Understanding some of the basic rules and concepts for creating retirement income will make this transition easier.

Understanding Asset Classes

The first thing to grasp a full understanding of for creating retirement income is that of how to allocate your investments by asset class. Asset classes refer to how an investment is classified and how it behaves in relationship to other types of asset classes. Asset class examples are large cap, mid cap, small cap, international, municipal bonds and cash. There are 22 asset classes in total, of which a portion will appear in your portfolio based upon your risk tolerance and investment objectives. Spend time to evaluate your own personal income needs, your risk tolerance and your time frame with a portfolio generator or with a financial professional to develop your own ideal asset class breakdown.

One of the most significant things that you will notice when creating your retirement income portfolio is that your ratio of equity to fixed income investments will shift. Most investors when they are in retirement are more concerned with generating income and preserving capital rather than generating capital returns on an annual basis. You will likely have over 50% of your portfolio in fixed investments such as CDs and bonds. You will be concerned with filling these percentage allocations with the best CD rates and best paying bond rates within each asset allocation category.

Understanding When to Take Withdrawals

Once you have developed the ideal portfolio mix, you will need to determine when and where to take your income withdrawals from. The perfect scenario would be to establish an automatic method where the income or dividends from the different asset classes would be deposited into your cash account. Then, on a quarterly basis, you could withdrawal the cash portion without disrupting the other portions of your portfolio.

Make Portfolio Adjustments

You will need to adjust your portfolio either semi-annually or annually as it changes or as your personal income needs change. For example, some asset classes will outperform others. When this occurs, an asset class will end up at the end of the year having a higher percentage weighting that you desire. You will need to take those earnings and redistribute to the asset classes that did not do as well, causing their weighting to decline. Making these adjustments will help to give you the best possible annual returns possible.

You will also need to made adjustments to your income stream as needed. If your portfolio does not generate the projected return, you may need to adjust your income downwards until the portfolio rebounds. And, if your portfolio is showing a return in excess of your projection, you will be able to take a large income stream for the year than originally projected, giving yourself a raise.