During your working years, you generally know how much money you make, so you can budget accordingly. But once they retire, the story is different. However, with some diligence, you can create a “paycheck” that can help meet your income needs.
Where will this salary come from? Social Security benefits should replace about 40% of pre-retirement earnings, according to the Social Security Administration, but that number varies widely depending on an individual’s circumstances. Typically, the higher your earnings before retirement, the lower the percentage that will be replaced by Social Security. Private pensions have become much rarer in recent decades, although you may receive one if you work for a government agency or large company. But in any case, to fill your retirement check, you may need to draw heavily on your investment portfolio.
Your portfolio can provide you with income in the following ways:
Dividends – When you were working and didn’t have to rely on your portfolio for income as much as you will in retirement, you may have reinvested the dividends you received from stocks and stock-based mutual funds, increasing the number of the shares you hold in these investments. And it was a good move, because increasing your stock ownership is a great way to help build wealth. But once you retire, you may need to start accepting dividends to increase your cash flow.
Interest payment – Interest payments from bonds and other fixed-income investments, such as certificates of deposit (CDs), can also add to retirement income. In the years immediately before retirement, some investors increase the presence of these interest-paying investments in their portfolio. (But even in retirement, you’ll need some potential for growth in your investments to help you stay ahead of inflation.)
Income from the sale of investments – Although you will likely need to start selling investments once you retire, you should be careful not to liquidate your portfolio too quickly. How much can you sell each year? The answer depends on several factors: your age, the size of your portfolio, the amount of income you receive from other sources, your spouse’s income, your retirement lifestyle, and so on. A financial professional can help you determine the amount and type of investment sales that suit your needs while considering the needs of your portfolio over your lifetime.
When using your investments as part of your retirement check, you’ll also want to pay close attention to the amount of cash in your portfolio. It’s a good idea to have enough cash on hand to cover a year’s worth of your living expenses, even after accounting for other sources of income, such as Social Security or pensions. Also, you may want to set aside enough cash for emergencies. These cash cushions will not only help you with the cost of living and unexpected costs, but also allow you to avoid digging deeper into your long-term investments than you’d like.
You may be retired for a long time, so take the necessary steps to build a consistent retirement income.
Jennifer Barrett (AAMS) is a local financial advisor at Edward Jones.
225-612-0413 | jennifer.barrett@edwardjones.com
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Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. You should consult your estate planning attorney or qualified tax advisor regarding your situation.
This article was written by Edward Jones for your local Edward Jones Financial Advisor.
