Pre-Retirement Planning Advice to Create Predictable Income

Editor's Note: The following is an excerpt from Retire in a Weekend! The Baby Boomers’ Guide to Making Work Optional. Catch a sneak peek of the authors DVD, The 10 Biggest Mistakes People Make When Retiring & How YOU Can Avoid Them at www.RetireinaWeekend.com.

Creating a steady stream of predictable income from your retirement portfolio is easy. It’s as simple as picking up the phone and talking with your current investment provider. Tell them you’d like to begin receiving money on a regular, recurring basis. For example, some of my clients like to take money two times per month to replicate their former biweekly paychecks. Others prefer money once per month. Some take money quarterly, semi-annually or annually. A few just take it on an as-needed basis. Regardless, most investment companies (mutual fund companies), and to a lesser extent insurance companies and banks, offer great flexibility when it comes to getting your hands on your money. Each company has its own policies and procedures, and it’s highly likely that you’ll have to sign distribution forms and paperwork to make it happen. Finally, you should have the flexibility to have your provider issue you a physical check or transfer the funds electronically. I suggest the latter because you’ll have less paperwork, you’ll save time, and know funds are available on a certain day each month without having to worry about it.

You can instruct your investment provider to pay you the dividends and interest your investments earn each month. Under this arrangement the amount of money you receive will fluctuate slightly from month to month but you will not be touching your principal. Other people opt to have their investment provider send them the same amount of money every month. This is typically known as a systematic withdrawal where you will receive the same dollar amount of money on whatever pre-determined frequency you establish. In this latter example though, it’s possible that you could be liquidating a portion of your principal if the amount of money you take out is greater than all the interest, dividends, and capital growth combined.

Creating a sustainable income stream from your retirement portfolio is harder since we don’t know how long we’re gonna live. With a healthy diet, regular exercise, good times with family and friends, anything is possible. Will your retirement last 10 years, 20 years, 30 years or 40+ years? It’s anyone’s guess. That’s why it is so vitally important to monitor how much you’ll take out of your accounts (as a percentage of your overall portfolio) at least once per year. Obviously, the less money you take out, the lower inflation is, the lower your investment costs, and the higher the rate of return you earn on your money, the longer your nest egg will last. Conversely, the more money you take out, the higher inflation is, the higher your investment costs, and the lower the rate of return you earn on your money, the shorter your nest egg will last.

Most people in my industry believe that withdrawing 4% of your nest egg per year beginning in year one and then increasing the amount of the withdrawal every year to account for inflation is a prudent strategy. Unfortunately, this 4% rule has become gospel in my industry because of some number crunching and analysis using historical data. But what if history doesn’t repeat itself? What if we run into a prolonged period of negative or low investment returns (bear market)? What if we have a prolonged bull market (markets go up)? What if you want more than 4%? Listen, the future cannot be predicted with any certainty. There is no magic number.