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Turning Retirement Savings into Retirement Income

You’ve saved years for retirement. Once you reach retirement, how do you create a stream of income from your savings to meet your needs?

Every income strategy is unique, but each must address one common risk: longevity—the risk of outliving your assets or spending too much too fast. Additionally, there is a risk of leaving substantial assets untapped at death, or, said differently, the risk of not spending enough.

Before deciding on an income strategy, you must first determine your income needs. Usually, this figure is based on some type of gap analysis calculation.

The formula I use with clients is as follows: Wage Replacement Ratio (WRR) minus Annual Employer Pension Income minus Annual Social Security Income equals Annual Income Gap.

The resulting sum, or Annual Income Gap, is bridged by withdrawals from your retirement savings. There are three main strategies for taking these withdrawals.

1. Inflation-Adjusted Withdrawal Method: Assumes withdrawal rate is fixed, increased annually by inflation. Payments will be sustainable throughout lifetime of retiree, with the intention that principal won’t be touched.

Pros  Cons
 Investment principal is protected (individual will never run out of money)  A larger nest egg is required to generate the required income
 Assets can be passed to heirs RMDs may cause withdrawal rates to exceed the 4-5% withdrawal target


2. Total Amortization Method: 
The process of paying out monthly retirement income over a fixed period of time at a fixed rate of return. This method’s goal is to achieve a balance of $0 at the participant’s death.

Pros Cons
You can squeeze every drop out of an investment account to get as much income as possible. To accurately calculate the correct income, the participant would need to know his or her date of death.


3. Dynamic Withdrawal Method: 
Assumes the retiree will consume more resources in the first 10–15 years of retirement than in the next 15–25 years. A higher, more aggressive withdrawal rate is used in the first stage of retirement and stepped down as the retiree ages.

Pros Cons
The higher withdrawal percentage allows for more income during the retiree's first 10-15 years of retirement, usually the most active. Due to the aggressive nature of this strategy, a larger percentage is withdrawn annually, and the principal could be depleted rapidly if there are some consecutive years of poor performance.


No one method is perfect and most retirees change their approach as circumstances change. The withdrawal strategy you select should be very carefully considered, reviewing all income projections and income needs. A comprehensive financial plan is one of the best ways to identify your risks, taxes and needs. 

The information discussed in this article is for general informational purposes only and should not be considered an individualized recommendation or personalized advice. There are many considerations to be made when developing an income strategy, and the strategies mentioned here may not be suitable for everyone. Each individual needs to review an income strategy for his or her own particular situation before making any decision. Examples provided are for illustrative (or “informational”) purposes only and are not intended to be reflective of results you can expect to achieve.