For all these years you have been faithfully putting money into your retirement accounts. At first it was hard, but then it became a habit. Then it just became a part of who you are…you’re a saver. And you feel good about that.
But then comes the day you’ve been working for – retirement – and they say you’re supposed to do the very thing that was anathema to you as a saver – take..money…out!
If you are a true, died in the wool saver, it just feels weird. Kind of…risky.
And when it comes to drawing money out of your retirement accounts to live on in retirement, the first risk that most commonly comes to mind is running out of money. No one wants to outlast their money.
But think of the person so paralyzed they this fear that they forfeit the use and enjoyment of the money they worked so hard to save and accumulate over their working lifetime. What use would saving a million dollars be if you never took the occasion to spend and enjoy it?
Consideration of these two extremes ought to highlight the obvious balance most of us strive for (whether we realize it or not). We want to be able to spend as much of our retirement assets as possible, without fear of ever running out.
With that desired balance in mind, let’s begin an examination of the four most common ways to tap into your retirement funds for a regular income stream.
1. Interest only method. This used to be the most common way retirees would tap into their savings. Funds might be deposited at a bank CDs or invested in interest bearing bonds issued by the federal government, a local municipality or a corporation.
As recently as 2007, CDs paying 5% were available. Now you’ll search hard to find one paying one tenth that amount, and then only if you lock in the term for a long time. I don’t think I need to go on and on about the risk of interest rate declines – nearly everyone with any money at all has seen the devastating impact on savers of the Fed’s efforts to stimulate the economy.
Bonds have been similarly impacted by the Fed’s interest rate cuts.
So, the method once assumed to be the “safe” route (taking interest only as income) has proven to be not (always) so safe.
2. Spend down method. The second method involves spending not only the interest, but also chunks of principal. Obviously this means more income to spend…at first. Equally obviously, if you keep this up, at some point in time you will run out of money!
It is possible to plan out a spend-down strategy so that one’s after tax income will be significantly higher (about double) and the money will still last about twenty years. Still, the risk remains of living “too long.”
Next week, we’ll examine two additional methods and see when any one (or combination) of the methods might be appropriate for you.