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I will have 5 potential income streams if I retire from my current position at age 62. The first is a pension from current employer, that will pay me 46% of my gross salary. Second is a pension from a former employer, worth $1000 monthly at age 65. Third is Social Security, but I plan to wait until age 70 to file.
Since the first three income streams will be available at different ages, I’m considering how to handle the fourth and fifth potential income streams, working and drawing down my investments. Ideally, I’ll find lower stress work to help pay bills for a few years. I rather like the structure of a job, but I’m looking forward to leaving management in a few years.
if I didn’t have pension income, I’d probably buy an annuity to cover essential expenses, then use investments for discretionary expenses.
Not easy. Start saving early and contribute the max you can to a retirement pension plan, public or private. Compounding is your best friend. You could also invest in real estate that could be a big part of your egg nest.
You can currently receive a 3.54% risk-free return on I bonds. These can be purchased through TreasuryDirect.gov with an annual limit of $10,000 per account holder. To learn more, read this excellent piece by Jason Zweig:
One source of retirement income I don’t often see mentioned is cumulative preferred stocks. These often times have a par value of about $25 per share, and some pay dividends of 8 per cent or more. In the past I have owned the preferred of companies such as CHS, a huge ag cooperative which paid an 8% coupon (trades as CHSCP). Fidelity has a section in their stock screen web site to find these.
Many of them have current yield in the 5-7 per cent range. These is also a Preferred Stock ETF trading under the symbol PFF.
It’s not too difficult to construct a portfolio of dividend paying REITs, ETFs, CEFs, BCDs and a few individual stocks, to produce a 7% yield. I am doing this and my dividends pay for our entire spending in retirement, of around $90K annually, without having to apply yet for Social Security and without a pension; none of my holdings need to be sold to meet our spending. There is way too much emphasis on only ‘dividend growth’, although this has some importance. But so many of these ‘Aristocrats’ have less than a 1.5% or even 2% yield; some yields are under even 1%! Even if they grow 5-10% a year, their dividends will not be able to provide much retirement income.
This is almost exactly our plan RayRayyy. After years of being Bogleheads we became DGI’ers. And then as I reached mandatory airline retirement we began the process of slowly morphing to DHI (Dividend Growth Investing>>Dividend “Harvest” Investing). Almost a year into this thing called retirement we haven’t come close to touching principal. I have avoided ETF’s for the most part except where it’s difficult to diversify (i.e. small cap dividend payers). Holding mostly dividend champions, I prefer their regular dividend payments where an ETF will fluctuate their payments.
We may want to keep an eye on tax reform proposals in Congress. Some want to eliminate the “qualified” status on some dividends, and treat all dividends as income.
A recent article in the Wall Street Journal cited research showing that corporate dividend payments decline when taxes on dividends rise.
I would just add that if RAYRAYY’s portfolio is in 401K, IRA’s, Rollovers (as is ours) then the dividends and interest you withdraw is treated as income anyway.
Dividend Growth stocks. The operative word is “GROWTH”.
I am a big fan of working part time in retirement. The key is to find/create work that you love to do. Continuing to generate some active income provides a margin of (retirement) safety as described by Benjamin Graham.
In a few words, multiple sources. I am fortunate to live on a pension. To me the thought of not having a pension is scary and I do think about what it would be like without it.
I woukd seek to accumulate assets both within and outside retirement plans. I would take some of qualified assets and buy an immediate annuity. I would have brokerage account investments that generate income from dividends and interest without touching principal.
So, I would have RMDs, or 4% withdrawal before 72, SS, an modest annuity and dividends and interest and hopefully still growth from the investments long term.
I think retirees need to try to shift their focus away from “income” and simply toward using assets to fund their spending needs–whether that comes via dividends & interest or by selling securities.
Social Security, rental properties, pensions, annuities, and the like can help. But keeping a portfolio simple with stocks and bonds at the appropriate risk level is important. With the US aggregate bond market yielding about 1.5% right now, 1% below 5-10yr inflation expectations, reaching for yield can turn dangerous as it can lead to taking on an overly-risky portfolio.
It makes deferring Social Security to age 70 all the more important, particularly for married couples.
Bottom line: take a total return approach to retirement and diversify assets while not taking on too much risk or spending too much time managing the assets.
I think this is one of the most challenging questions in personal financial planning. A traditional pension, combined with Social Security, and some savings, made up the so-called “three legged retirement stool”. We all know what has become of traditional pensions, although some public sector jobs, and some private companies, still have traditional pensions. For most retirees in the present and future, Social Security, retirement savings, and possibly working longer, or part time, will have to do it.
The American College of Finance developed an entire certification (Retirement Income Certified Professional – RICP) to address this question. It requires 9 college credits, and 2 years experience to claim the certification. The curriculum was developed from some of the top minds in PFP, including Dr Wade Pfau (https://www.retirement-insight.com/how-much-can-i-spend-in-retirement-a-guide-to-investment-based-retirement-income-strategies/). I completed the class work in the summer of 2017 after I stopped working full time.
So the “best” strategy will focus on your personal situation. It will be dependent on your resources, your longevity, your risk tolerance, and your goals or desires. If you are wealthy and have ample resources, it becomes an optimization problem that maximizes income, minimizes taxes, and leaves a substantial legacy to your heirs. If you have meager resources, you have to find creative ways to fund your retirement. Strategies include part-time work, downsizing, home-sharing, support from children, and public resources.
For those of us between these two extremes, we have to choose if we want to lock in some level of guaranteed income (annuities), when two claim SS, how much risk we want in our portfolios, and how much we feel safe in withdrawing. One of the keys is an annual assessment of how the plan is working and making adjustments as required.