How to Generate Retirement Income From Your Investments 

How to Generate Retirement Income From Your Investments

By Scott D Abrahamson, CFP® and Chris Pawlowski, CFP®, CRPC®, APMA®

As someone who’s dedicated time and effort to build your retirement nest egg, you’ve likely envisioned enjoying the rewards of your hard work as you approach retirement. However, many people find the transition from saving to spending to be challenging as they shift their priorities and budgets. If you’re wondering how to transform your savings into regular income for your retirement years, this guide is for you. 

Read our top five tips for generating income from your portfolio in retirement and start planning for a financially stable future.

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 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:

Systematic Withdrawal Approach

With the systematic withdrawal approach, you withdraw a fixed percentage of your retirement savings each year. 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. Now, you may have noticed some general advice out there that points to a specific range or a “magic” number—and that approach has its merits. But we certainly take a deeper approach to these situations, as there are many components to consider when determining what asset to draw down first. 

That being said, this strategy aims 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 confirm the portfolio can last throughout retirement. 

Bucket Approach

Another way to optimize your portfolio longevity is to divide your savings into different buckets to match different time horizons. 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, many individuals spend their taxable accounts first, followed by their tax-deferred (or pre-tax) accounts, and finally their tax-free (Roth) accounts last. (1)

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.

Now, it’s important to note that, depending on your individual situation, you may need to use a mix of the three asset types to achieve a specific goal rather than following a strict order. Sometimes sticking to that order may not be the most sensible or tax-efficient strategy over the full course of your retirement. It’s crucial to understand these strategies in depth, so it’s wise to proceed with the guidance of a knowledgeable advisor or tax professional.

4. Consider Your Time Horizon

When planning how to generate retirement income from your portfolio, it’s vital to consider your time horizon. This factor will significantly influence your investment strategy and risk tolerance. For example, if you’ve saved for 25 years but anticipate a 35-year retirement, you’ll need to adjust your expectations so that your investments can sustain you over that extended period. This might mean adopting a more conservative investment approach to safeguard your income for the long haul.

Understanding your time horizon also helps you assess how realistic your retirement goals are. If your retirement timeline exceeds what your portfolio can support, it’s a sign that you may need to save more or explore alternative income sources. By addressing this aspect early on, you can refine your financial plan, potentially avoiding future shortfalls while creating a smoother retirement journey.

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, 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 SpringSource Wealth Advisors.

Looking for Guidance With Your Investment Income Strategy?

Going from saving money for retirement to using your retirement savings can be difficult for many people making this transition, especially if they lack a clear plan for withdrawals. At SpringSource Wealth Advisors, we can evaluate your retirement income goals and create a tailored strategy to optimize your savings and generate a plan. 

For further information on your choices, we invite you to set up an in-person meeting today or call (503) 714-9531 or email scott@springsourcewealth.com to get in touch.

About Scott

Scott Abrahamson, CFP®, is Owner and Wealth Advisor at SpringSource Wealth Advisors, a fee-only fiduciary Wealth Advisor with a passion for simplifying the retirement planning process and bringing clients peace of mind. With their goals-based planning approach, SpringSource helps individuals, families, and small businesses make smart financial decisions towards living an abundant life. As an independent CERTIFIED FINANCIAL PLANNER™ professional with over 20 years’ experience, Scott’s mission is to empower clients to reach financial freedom through exceptional, caring service. He takes time to explore each client’s core values about money and partners with them to formulate clear goals based on those values. The result is a powerful, personalized road map designed to help each client successfully navigate every life phase. Scott loves watching clients experience a sense of peace and financial independence through smart financial planning over time.

Outside of the office, he enjoys playing and coaching sports, boating, outdoor activities, spending time with family, and serving in the community. To learn more about Scott, connect with him on LinkedIn.

About Chris

Chris Pawlowski, CFP®, is Wealth Advisor at SpringSource Wealth Advisors, a fee-only fiduciary Wealth Advisor with a passion for making the retirement planning process simple. With their goals-based planning approach, SpringSource helps individuals, families, and small businesses make smart financial decisions and realize the core value of their finances: living an abundant life. Since entering the financial planning industry in early 2013, Chris enjoys understanding his clients’ goals and working hard to formulate effective strategies for them. With the technical experience in the planning industry that puts him in a strong position to help clients through every life stage, Chris desires to empower families to reach financial freedom through exceptional, caring service.

As a Veteran who served in both the U.S. Army and the CA Air National Guard, Chris has a special passion for helping his brothers and sisters at arms in pursuing their financial goals. He holds the CFP®, Chartered Retirement Planning CounselorSM (CRPC®), and Accredited Portfolio Management AdvisorSM (APMA®) designations. Outside of the office, Chris devotes his time to his beautiful wife, Yvette, his church, and his hobbies, which include backpacking, kayaking, hiking, and enjoying time with his family and friends. He also partners with Hope World Wide, a faith-based charity organization in Portland, to serve local families in need. To learn more about Chris, connect with him on LinkedIn.

Information provided herein is provided by SpringSource Wealth Advisors, LLC. This information is for general informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Information was compiled from third-party sources believed to be reliable and accurate but cannot be guaranteed. Investment advisory services are offered through Wellspring Advisors, Inc., an SEC Registered Investment Advisor. Neither SpringSource Wealth Advisors, LLC  nor Wellspring Advisors, Inc. render any legal, accounting, or tax advice. All investments involve risk, are not guaranteed, and may lose value. We recommend that all investors consult with a qualified adviser to assess your personal situation before implementing any strategy.

Please remember to contact your advisor when your financial circumstances or objectives change. Your advisor may recommend adjustments to your financial planning and investment strategies to better suit your current situation.

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(1) https://www.irs.gov/retirement-plans/roth-iras