Four Little-Known Strategies To Generate Investment Income During Retirement, by Bill Hoff

This article was originally published here

Most people think about retirement in two different ways. They think of retirement as a period of freedom when they can use their time to do anything they like. On the other hand, they think that planning for retirement is tasking. Especially when you begin your savings late, or you are bothered that you will not live the life you desire after retirement. It might help if you made a good plan to generate investment earnings from investment plans, such as the TSP.

Below are the four strategies that have worked for many people. If your money is in the TSP, you can implement only one of the strategies. Adequate knowledge about these strategies puts you in a better position to live your desired lifestyle when you retire.

Strategy of Systematic Withdrawal  

The most common strategy for generating income during retirement is the systematic withdrawal. The systematic withdrawal is when you save money in your retirement plan for several years, and then you finally withdraw it again. It is a bit more complex than the regular savings in an investment account, and it is the only strategy that you can implement if your money is in the TSP. 

Due to a lack of flexibility with the TSP, it does not apply to other strategies. When you save in retirement plans such as the TSP and 401(k) plans, your savings are used to buy many investable products, and the value of this product fluctuates over time. If you withdraw from your retirement savings, you are gradually selling these products while your bonds and stocks are shrinking.

After each withdrawal, you will have a smaller amount of savings that can yield more money for you. Suppose you want to use a systematic strategy. In that case, you must consider the amount of money you will need for a particular period of time so that your income will suffice you longer.

Bucket Strategy 

This strategy is also referred to as time segmentation. With this strategy, you can partition your investments into divisions depending on when you want to make use of the income they will generate over time.  

For instance, if you plan to spend thirty years after retirement, you can generate more income by designing a near-term investment bucket for the first ten years, a mid-size bucket for the next ten years, and a long-term bucket for the last ten years. The longest investment bucket contains a risky investment that will accumulate huge rewards as time passes. The near-term investment bucket has less risky investments that you will not bother about when the market fluctuates.

Although you don’t need the money in the long-range bucket now, you have to create a great diversity within each bucket in case of any potential risk. You need to adjust the bucket because you will not want all your money to be in the riskier investment when you are in your third stage of retirement. You will want to segregate your money between high- and low-risk investments. 

The bucket strategy applies mostly to investors who are making investments. Still, they want to be in control of the risk associated with their investments. This strategy gives you a better understanding of risk and how to maintain your balance during market fluctuations. However, it requires you to pay adequate attention, since you need to adjust the bucket depending on the market situation. 

Income Portfolio Strategy

The income portfolio strategy doesn’t generate income by selling your investments. Instead, it uses your investment to generate revenue. For instance, if you have $900,000 as an investment, you can create a bond ladder, which will create more income with time. You can also generate income that will pay for your living by getting stocks that will pay dividends, and this does not require you to sell your investments. You can distribute your income portfolio between bonds, stocks, and CDs. 

This strategy is the best for investors who need a small amount of investment income after retirement, and those who receive rental income and a pension serve as auxiliary sources of income. The income portfolio strategy gives your money a firm foundation because it doesn’t require you to sell your investments. Since you are not selling your investments, you will indeed have peace of mind. The only deficit with this strategy is the fluctuation of income every month.

Essential Versus Discretional Strategy

This strategy is referred to as a flooring strategy. It allows you to separate your needs from your wants when you retire. 

This strategy’s ultimate goal is to provide income that will cover your essential needs, such as food, health insurance, housing taxes, etc. These essential needs are non-avoidable, and the income you will use to pay for them should be from a source that has a low risk and is very stable. Examples of such stable income sources include the money you receive from Social Security, bond ladders, annuities, and reliable pension income.

Once you make the necessary arrangements that will cater to your needs, other things are secondary. The finance for your wants, such as traveling to Europe, will benefit from the income you generate from risky investments because these investments exhibit high fluctuations. The point here is that you can always adjust your wants depending on the economic condition. 

This strategy works best for people who want to get along with the economic flow or people with a less rigid outlook. It ensures constant provision for your essential needs while balancing the reward and risk. 

These four strategies will help you to generate more income during your retirement period. You will create more income by choosing the best strategy that fits you.


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