Cypress Wealth Services
November 2023
Making the transition from wealth accumulation to creating a sustainable income stream in retirement is a pivotal step in the financial lifecycle. Many people, especially high-net-worth families and business owners, face the challenge of moving from saving for the future to utilizing their hard-earned savings effectively. In this article, we explore strategies and considerations to help you make the most of your investment portfolio to create a steady source of income in your golden years.
1. Determine How Much You Can Safely Spend
Before making any decisions about how to withdraw from your portfolio, it’s crucial to first understand how much you can safely spend. The last thing you want is to spend too much based on a general rule of thumb and risk running out of money later in retirement. There are a number of factors to consider when determining how much you can safely spend, including long-term goals, lifestyle expenses, expected life span, and healthcare needs. Working with a qualified financial professional (*1) is a great way to determine the right amount for your needs.
2. Understand the Different Withdrawal Strategies
Once you have determined how much you can safely spend, it’s time to look at the different withdrawal strategies available. In general, there are two main methods for turning your savings into income:
With the systematic withdrawal approach (*2), you withdraw a fixed percentage of your retirement savings each year, typically between 3% and 5%. The general rule of thumb is 4% in the first year of retirement and increase the amount each year to account for inflation. The withdrawal rate is based on the value of the portfolio at the start of each year, so the amount of income can fluctuate depending on market performance.
This strategy allows you to generate a steady stream of income while still allowing for flexibility and potential growth of your investments. However, it’s important to monitor the withdrawal rate to ensure the portfolio can last throughout retirement.
Another way to optimize your portfolio longevity is to divide your savings into different buckets to match different time horizons (*3). Each bucket will have investments tailored to that time horizon in terms of asset class, risk level, and liquidity.
One common approach is to divide your portfolio into three buckets:
- A short-term bucket will be invested conservatively in cash, bonds, and other low-risk assets. This bucket is for your expenses over the next 1-3 years.
- A medium-term bucket will be slightly more aggressive, investing in a mix of stocks and bonds to generate growth and income over the next 3-10 years.
- A long-term bucket will take on much more volatility by investing primarily in stocks or other growth-oriented assets for expenses that are 10-plus years away.
By dividing your portfolio into buckets, you can potentially generate income from your medium-term and long-term buckets while ensuring you have the funds you need for near-term expenses. Keeping the long-term bucket invested in growth assets also increases your odds of keeping pace with inflation over time.
3. Maintain Tax Efficiency
You may not think much of it, but the order in which you withdraw from your investment accounts can significantly impact the longevity of your portfolio. In general, it’s best to spend your taxable accounts first, followed by your tax-deferred (or pre-tax) accounts, and finally your tax-free (Roth) accounts last (*4).
Spending your taxable accounts first can help minimize your tax liability in retirement. This is because withdrawals will be taxed as capital gains rather than ordinary income as long as the underlying investments were held for longer than a year. This strategy also allows your investments to grow tax-deferred longer.
Once you have exhausted your taxable accounts, you can begin withdrawing from your tax-deferred accounts. Since these accounts are subject to ordinary income taxes, it’s important to plan your withdrawals carefully to minimize the tax hit.
Finally, once you have exhausted your taxable and tax-deferred accounts, you can begin withdrawing from your tax-free accounts like Roth IRAs and Roth 401(k)s. Withdrawals from Roth accounts are not subject to income taxes, making them a valuable source of tax-free income for future use.
4. Consider Annuities
Another important consideration for generating retirement income is annuities (*5). Annuities can provide you with a more reliable source of income in retirement. When you purchase an annuity, you pay a lump-sum premium to an insurance company in exchange for regular income payments over a set period of time, or for the rest of your life.
Annuities can be a good option for retirees who want the stability that comes from a consistent income stream. However, it’s important to consider the fees associated with annuities, which can be higher than other investment options. Additionally, it’s important to select an annuity that fits your needs and goals, as there are many different types of annuities available with different features and benefits.
Working with a financial advisor (*6) can help you determine if an annuity is a good option for you and which type of annuity is best suited for your retirement income plan.
5. Don’t Forget About Long-Term Growth
Many people are quick to assume that retirement means your portfolio must become ultra-conservative, consisting only of cash and bonds as a way to safeguard against market volatility. While your portfolio should become slightly more conservative, you still need assets geared toward long-term growth.
As tempting as it is to invest solely for income, avoid investing your entire portfolio in income-producing assets like bonds or dividend-paying stocks. The interest payments received can fluctuate wildly from year to year and your payments are unlikely to keep up with inflation. Dividend investing also has some major disadvantages (*7), including higher fees and taxes, as well as questionable historical performance.
Those looking to maximize their retirement savings should invest in a diversified portfolio that includes both income and growth-style investments. Of course, the specific allocation that’s right for you depends on your individual financial goals, risk tolerance, and other factors. This is something we can help you determine at Cypress Wealth Services.
Get Clear on Your Retirement Strategy Today
Moving from the phase of accumulating retirement savings to utilizing them can be a hurdle for many high-net-worth families and business owners, particularly without a clear withdrawal strategy.
At Cypress Wealth Services (*8), we work to evaluate your retirement income requirements and craft a strategic plan to optimize the use of your savings. Are you ready to explore your options further? Call us at 866.888.6563 or contact one of our offices (*9) today.
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high-net-worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services serves a broad range of client needs using their knowledge and expertise to act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring the wealth and legacy a person has already built to their loved ones. With financial advisors in California, Alaska, Arizona, and Georgia, the firm serves clients across the country with Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.
