How may investors generate income in retirement?

Do you know how much income you’ll need in retirement, or how you may need to generate that income? Here’s what to know.

What do you mean by “retirement income”?

It’s the amount of income you’ll need to cover your expenses once you’ve retired. Retirement income often includes a combination of assets on a scale of stable to variable.

Income sources, from more stable to more variable: Social security, pensions, annuities, employment earnings, investment income, principal, withdrawals, other.

Income sources, from more stable to more variable: Social security, pensions, annuities, employment earnings, investment income, principal, withdrawals, other.

How much income will I need in retirement?

70% to 90%

of preretirement income

Often, the goal is to maintain a standard of living similar to the one you enjoyed when you were working. Many investment professionals suggest a replacement ratio of around 70%–90% of preretirement income.

For example, if an individual had a gross income of $100,000 before retirement, this suggests he or she would need between $70,000 and $90,000 for the first year of retirement.

What are the primary risks to my retirement income?

We’ve identified seven common risks to retirement income that retirees face. Here, we outline those risks and offer potential strategies to mitigate each.

  Market volatility risk Inflation risk Withdrawal rate Health care costs Longevity risk
Strategies to Help these Risks
Comprehensive initial planning Significantly effective Significantly effective Significantly effective Moderately effective Moderately effective
Expense budgeting Significantly effective Significantly effective Moderately effective Moderately effective Significantly effective
Effective withdrawal planning Significantly effective Significantly effective Significantly effective Low / No effectiveness Significantly effective
Diversified income sources Significantly effective Moderately effective Moderately effective Low / No effectiveness Significantly effective
Inflation-adjusted income sources Low / No effectiveness Significantly effective Moderately effective Moderately effective Significantly effective
Asset and product allocations Significantly effective Significantly effective Moderately effective Low / No effectiveness Significantly effective
Cash reserve and liquidity management Significantly effective Moderately effective Significantly effective Significantly effective Moderately effective
Continuous monitoring and adaptive planning Significantly effective Moderately effective Moderately effective Significantly effective Significantly effective
  • Significantly effective

    Significantly effective

  • Moderately effective

    Moderately effective

  • Low / No effectiveness

    Low / No effectiveness

How much can I withdraw from my portfolio for income in retirement?

The commonly held belief:

4%

per year

A 4% withdrawal rate is often thought to be acceptable, but the truth is that there’s no single answer. A number of factors can influence your recommended withdrawal rate, including:

  • Your expenses
  • Inflation
  • The performance of your investment portfolio

Because your income from your portfolio can fluctuate, you should monitor your spending and adjust your withdrawal strategy according to its performance.

Retirees in particular should strive to reduce the amount they withdraw following difficult market periods, which should enable them to keep more in the market if markets recover.

What are my key takeaways?

key takeaways icon

  1. It’s important to estimate what your spending and income needs will be before you retire, and adjust your portfolios to address those needs.
  2. A variety of income sources can be used to fund retirement. These include Social Security, pensions, investments, and savings, for example.
  3. Investors should determine the impact various investment strategies may have on the performance of their investment portfolios. In our opinion, they should consider focusing on a total-return approach and understand the difference between portfolio yield (dividends or interest an investor should expect to receive) and income (what investors live on in retirement, regardless of an asset’s price).
  4. In addition, we believe determining the withdrawal rate of an investment portfolio is key to mitigating market and longevity risk.

What questions should I be asking as I get close to retirement?

talk box
If you are nearing or already in retirement and are concerned about generating adequate income to support your specific needs, here are some questions to consider.

  • Will I need to make lifestyle changes in retirement?
  • What happens if there’s a change in my income sources?
  • How can I help ensure that my investments are sustainable for my needs?
  • How can I manage rising inflation in my retirement plan?
  • At what age should I begin claiming Social Security benefits?
  • How much should I anticipate spending for health care in retirement?
  • Is my portfolio diversified enough to meet my goals?
  • Is it time to rebalance my portfolio?

All investments are subject to market risk which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors due to numerous factors some of which may be unpredictable. Be sure investors understand and are able to bear the associated market, liquidity, credit, yield fluctuation and other risks involved in an investment in a particular strategy.

Wells Fargo Investment Institute is not a legal or tax advisor.

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