How to develop a retirement income strategy

You’ve spent the majority of your working life building up your nest egg in preparation for retirement. Now what do you do as you shift your focus to spending down instead of always saving?

It turns out accumulating retirement assets isn’t just a pre-retirement task — it happens in retirement as well. Having an income strategy is important so your money is working for you even as you start to use your assets.

Part of that income strategy is knowing how much you’ll need. Let’s say you’ve determined that you’ll need 75% of your pre-retirement income every year in retirement. So, if your income before retirement was $200,000 (after taxes), you’ll need roughly $150,000 each year in retirement (plus your adjustment for inflation). That number, coupled with your life expectancy, will help you understand how much you’ll need to retire.

What if your current assets and expected Social Security benefit won’t cover that number? What if you’ve calculated your potential withdrawals (using the 4% rule, for example) and it’s still not enough?

Consider these revenue streams in retirement that can supplement your nest egg.

Perhaps you’re looking for higher yields for your nest egg in retirement and do not want the risk associated with a non-FDIC-insured product. You can use a certificate of deposit (CD) ladder or bond ladder to get the benefits of higher-yielding accounts without having all of your funds locked away long term or risk potential losses.

Here’s how it works: Let’s say you have $160,000 to invest. If you elect to use a CD ladder, you could put $40,000 in a 12-month CD, another $40,000 in a 24-month CD, and the same in 36- and 48-month CDs. After the first 12 months, you can either use the money from the 12-month CD or reallocate it to a 48-month CD to keep the ladder going. (The 24-month CD will take the place of the 12-month, 36-month takes the place of the 24-month, and so on.)

The return — if you chose not to reallocate your returns into the ladder — would look like this:

Once the terms of each CD completes, you could put your returns back into separate 48-month CDs. Then your returns would look like this:

So, by putting your $160,000 into a CD ladder, eight years later you would have an additional $20,921 thanks to the interest you accrued.

Generally speaking, it's advantageous to put off collecting Social Security as long as you can. You can begin taking benefits at age 62, but your benefits will be reduced until you reach "full retirement age" at either 66 or 67 (depending on what year you were born). Waiting until full retirement age is important, but if you can wait even longer, your benefits can increase by 8% each year you wait, up until age 70.

Do you have the ability to work a part-time job to improve your cash flow in retirement? There are a number of benefits to doing this, including some health benefits. If you enjoy your current job, you could explore remaining on the team, just in a part-time role. That way you can continue to get the satisfaction and fulfillment that your work provides while not jeopardizing the freedom you want out of retirement. Or, if you'd prefer to leave your current company, you could explore other part-time jobs in fields that interest you.

Another retirement income strategy is to invest in an annuity, which allows you to receive guaranteed streams of income during retirement. Annuities involve investing money through a third party (typically an insurance company) and in return the third party makes payments to you based on the terms of the annuity (all at once, monthly, quarterly, yearly, etc.). You can choose between a fixed or variable annuity, as CNN Money explains.

It's important to remember that annuity products may lose value, are not deposits, not FDIC-insured, not bank guaranteed, and not insured by any federal government agency. All guarantees and benefits are subject to the claims-paying ability of the issuing insurance company.

Note: If you take withdrawals from an annuity prior to age 59 ½, you may pay ordinary income tax plus a 10% federal penalty tax. Speak with a financial professional for more details.

It's always important to have a game plan for your retirement, even after you've reached the milestone. To learn how to set up a retirement income strategy, schedule a Citizens Retirement Checkup at your nearest Citizens branch.