Turning Your Savings into Retirement Income: The 7 Questions That Actually Matter

Speaker 1: (00:00)
Saving for retirement and living off retirement savings are two completely different things. Today, we're gonna cover seven questions that will help determine if your retirement income plan actually works or falls apart.

Speaker 1: (00:19)
Hello, everyone. I'm Joe Allaria. This is the Retirement Power Hour Podcast, episode 43. Thank you for tuning in. And today, as I mentioned, we're gonna talk about how do you turn your retirement savings or your investments into a reliable retirement income stream. But before we go into that, wanted to mention that we do have other resources available on our website at retirementpowerhourpodcast.com. You can go on and listen to past shows, but most importantly, you can ask us questions, you can send those in, or you can request a free consultation by clicking work with me. So again, go to retirementpowerhourpodcast.com and you can get all of that at the website. So let's jump into the first question. Question number one, how do I turn savings into sustainable income without running out too early? Well, it's not just one thing. It's multiple things. And, and really four different factors that I wanted to, to talk about.

Speaker 1: (01:18)
First, it's developing a realistic spending plan. And so your expenses, how much do you wanna spend in retirement? There are a wide variety of answers to that question. Are you someone who wants to have a similar lifestyle to when you were working? Or are you someone who's gonna wanna do a whole lot of things that you weren't doing when you were in your career? Maybe, maybe you wanna travel more. Maybe you wanna buy the boat. Uh, maybe you wanna buy a second property. So you, you've gotta think about what do I want to spend? And a lot of times that starts with figuring out what are you spending now? Can you answer that question right now? If you can't, it's gonna be very hard for you to figure out what do I wanna spend in retirement? If you don't know what you're spending now, you're pretty much just shooting in the dark, making up a number.

Speaker 1: (02:06)
So it starts with, what am I spending now? And there are a lot of tools out there that you can use to figure that out. Second, coordinated withdrawals. So again, how, how much can I take? How much do I need to take and not run out of money? Obviously, we, we'd like more is always better, but we can't run out of money. And then you have investment structure. You've gotta have your investment structure match your time horizon. And we talk about that all the time. That is one of the keys of building a retirement income plan, using investments that match the time horizon for when your expected withdrawals are, are, are gonna take place. Last but not least, you have to review it. Uh, retirement has multiple phases, so it, it's going to take ongoing review to, to see did I forecast the proper amount of expenses?

Speaker 1: (02:56)
Did I properly assign the time horizon on my investments? So all of these things need to be reviewed ongoing and no rule of thumb is really going to replace a customized income plan for you. There are a lot of rules of thumb out there. The biggest one's a 4% withdrawal rule, but, uh, there, there are different things that you hear out in the public talking to friends and family. Nothing replaces a customized plan. And, you know, now when you retire, your paycheck's gone, your investments have to generate that income. It's a different ballgame. You have to think differently about it. Okay. Question two, should I withdraw from taxable accounts, IRAs and Roth IRAs in a specific order? Well, the old train of thought is to withdraw from taxable accounts first and then from traditional or pre-tax IRAs and then from Roth IRAs, saving the tax-free accounts until the end.

Speaker 1: (03:49)
And a lot of times that, that could work out well, but in reality, it's often not so clear cut. There are situations where that makes sense, but there are situations where it, it may not make sense. Let me give you a couple examples. Number one, if you are wanting to leave money to your children, you have kids, you wanna leave them an inheritance, and you're on track to have more than enough for your retirement and you're likely to leave money behind. I strongly believe that a Roth IRA is the best account type to leave to your kids because they're going to get that money tax-free and they're, they're able to leave the money in an inherited Roth IRA for up to 10 years, possibly having to take RMDs on the inherited Roth IRA during that time. But the majority of that money can still be left in the Roth, in the inherited Roth IRA for up to 10 years.

Speaker 1: (04:45)
And then at the end of that 10-year period, they'll have to take all that money out of the inherited Roth IRA. But it allows for even more tax-free growth during that extra 10-year period, plus all the tax-free inheritance that they received. So what about if you don't have children or maybe your goal is not to leave your kids a large inheritance? What if most of your money is gonna be left to a charity, for example? Well, in that case, you wouldn't wanna leave the Roth IRA until the very end because if you pass away and have Roth IRA money and all of your money goes to charity, you just missed a, a benefit there or a planning opportunity. In other words, if you leave a charity your IRA, they don't have to pay tax on that. So you kind of escape taxes by doing so.

Speaker 1: (05:34)
You could have used the Roth IRA while you're living because you won't pay tax on the Roth IRA. So we're trying to be tax efficient, but it comes down to what your goals and objectives are. Another factor to consider is we might need to use a blend. What if you, what if you have taxable accounts that you're planning to draw from, but that's your only source of income and, and maybe, maybe you've got a bunch of money in the bank and a savings account. Well, that's not gonna generate any income. So th- that's nice, but you might be missing an opportunity to take some money out of your IRAs and pay a very low rate of tax, if anything, or you might be missing an opportunity to do a Roth conversion, again, converting the IRA money at a very low rate of tax, if any tax at all.

Speaker 1: (06:22)
So you have to not use these rules of thumb and automatically apply them to your situation because in reality, it always depends and generally a custom solution again is gonna be better than a rule of thumb. Question three, what's the difference between a proportional and a tactical withdrawal strategy? Well, a proportional strategy draws a steady mix from multiple accounts each year. So it's taking a proportional amount from each account to kind of keep taxes steady, simple, or maybe you just go with the previous strategy of let's just empty one bucket, then go to the next bucket, then go to the next bucket. Well, a tactical strategy is going to do everything that I was talking about in the last question. It's gonna take your situation into account, take your goals into account. We might say, "Hey, this year, since you're not drawing social security yet, let's fill up your 12% bracket.

Speaker 1: (07:16)
Let's do some Roth conversions. Let's do some accelerated IRA distributions. But when Social Security kicks in, let's lower those or discontinue those, take more money from the taxable account." So a tactical strategy is looking at the different phases you have in retirement before Social Security, before Medicare, after Social Security, after Medicare, before RMDs, after RMDs. There are a lot of different phases that you may have in a standard retirement and a tactical income strategy is going to take that into account. Question number four, how should Social Security timing affect the rest of my income plan? Well, obviously, as you've probably heard, delaying Social Security will increase your Social Security benefit, and that's a good thing as long as you live long enough to recapture those higher payments. And that's a health question. That's a life expectancy question that we definitely don't know the answer to, and even you don't know the answer to.

Speaker 1: (08:22)
How long are you gonna live? If you knew that, we would be able to give you the best possible answer, but nobody knows the answer to that question. So a good train of thought is delay Social Security at least for a few years and perhaps even until your full retirement age, but that is going to create a gap, an income gap where you'll need to fill that gap prior to Social Security coming in. And it's not something that some people like doing. They wanna take money from Social Security and they wanna protect their own money. But if you think about it properly and think about the big picture and trying to reduce risks and the risk of running out of money long term, oftentimes delaying Social Security, if you're healthy, if you are likely to live to a normal life expectancy, delaying Social Security, using your own investments, possibly, again, taking advantage of Roth conversions in those years where your income is low could help you long-term, even in your life, it could, it could put you on a breakeven path to get you more tax-free money and to, and to have you enjoy that benefit in your lifetime rather than just your kids enjoying those tax-free benefits.

Speaker 1: (09:38)
So Social Security timing and portfolio withdrawals and tax planning, they're all linked. And again, it comes down to your situation. When did you retire? How much are your expenses? It's, it's very difficult for someone who retires in their late 50s, for example, to delay Social Security all the way to 67 if you spend an average or above average amount of money. That, that's difficult unless you have a very large portfolio. Sometimes it can cause too much strain on the portfolio. And there are a number of Social Security withdrawal strategies that, that can be implemented and they all vary based on what is your benefit and what is your spouse's benefit? Uh, how old are you? Are you the same age? Is there an age gap? Who's healthy? Who's not? These are all things that need to be taken into consideration, but in general, delaying Social Security in a perfect world is something you, you'd like to do, assuming you're gonna live at least to a normal life expectancy.

Speaker 1: (10:39)
Question five, and this is a big one. Can part-time work or annuities make your retirement income plan more sustainable? Absolutely yes. And I'm a big fan of part-time work. Don't shoot me. I'm a big fan of semi-retirement income just because I know how impactful it can be. If you're someone that has more than enough retirement assets and you don't need semi-retirement income, then don't worry about it. But if you're on the fringe and you want to get out of your job, which is so many people that I talk to, they wanna retire yesterday, but they're, they're not quite at the point where they can do so safely. So if they can retire from their main job, but pick up some semi-retirement income, maybe you're making $100,000 a year and maybe you go work part-time and make $30,000 a year, you would be surprised how much of an impact that would make just to have that $30,000 a year coming in.

Speaker 1: (11:40)
So there's semi-retirement income that could certainly help. And then you have annuities. Can annuities help your retirement income plan? Well, annuities come in all different shapes and sizes and types. So the structure of your annuity contract is incredibly important, but oftentimes when I'm thinking about retirement income, I'm thinking about an annuity that provides some sort of income benefit as, as really, that's where annuities originated. Uh, they, they can provide a lifetime guaranteed income stream, again, that is, is there for you as long as you live, not until the account value hits zero, like some of your, or all of your investment accounts in your bank accounts. When those hit zero, you're done. There's no more income. When you purchase an annuity and you take a lump sum of money and you buy an annuity, it has the ability, again, to provide you a guaranteed income stream, and that protects against you living a long time.

Speaker 1: (12:44)
It's like a pension. If you have a, a, a defined benefit pension plan that's paying you a certain amount every month, you're not really worried about how long you live. Why? Because it's good for as long as you live, and maybe even as long as your spouse as well. Annuities can work like that, but the real question is, can the annuity provide you as much or more income than you could get from a traditional investment portfolio? You know, that's a hard question to answer because we don't know how long you're gonna live. But if you're very risk averse and you're not able to take the, the volatility emotionally that an investment portfolio would require, and then an annuity might be good for you. If you really think you're gonna live a long time, then an annuity might be good for you. Or maybe you just want an annuity to help increase your income floor.

Speaker 1: (13:43)
In addition to social security, you might want to have some more guaranteed income from the annuity so that you know, hey, my social security is always coming in and my annuity income is always coming in no matter how long I live. If that covers your fixed expenses, for example, and helps you sleep better at night, then the annuity could be a good solution. Again, who's backing the guarantee? What type of contract structure do you have? Those are incredibly, incredibly important. And annuities being as rigid as they are, I always urge people, don't rush into an annuity purchase, make sure you understand it fully. Question number six, how often should my income strategy be reviewed? Well, we think at minimum annually, because you've got all the phases I mentioned earlier that, uh, again, maybe you start retirement and you're not taking social security, maybe you're not on Medicare yet.

Speaker 1: (14:39)
As these different phases come and go, it's important to review and update your strategy. And RMDs, which kick in for everybody, you know, in your 70s right now, 73, phases to, uh, 75 for some of you that are a little bit younger, but these are all things that need to be reviewed, your health, your health changes, tax law changes. So review the, your income plan every single year. It's not a one-time decision. It's a living, breathing plan that needs to be updated and modified as time goes. And that's where you can really get a lot of value in those, those minor tweaks and updates as your situation changes and as the environment changes as well. Last but not least, question number seven. What's the biggest investment mistake retirees make once they start drawing income is, and I love this one, treating every account the same way.

Speaker 1: (15:35)
You know, I, I see people that come to us that, that have Roth IRAs and traditional IRAs and taxable accounts, and I see some of them that have the same allocation in every single account. And so what that tells me, a- a- and most times people are not taking a proportionate amount from each account, and sometimes these people aren't even retired yet. So what it tells me is there's not a clear plan in place for what each account is being used for. I would say most people come in, they want to defer their tax-free dollars. If they are married, a lot of times, again, they want to leave the, those tax-free dollars to their children, at least in some cases. And so that's an opportunity. We need to be more aggressive on that money. We need to have a higher percentage of stocks on that money because it's gonna be there longer.

Speaker 1: (16:27)
For our shorter term money, we need to take less risk and maybe not have as a high percentage of stocks in those taxable accounts if we're gonna use those accounts, or in the IRAs, if we're gonna use the IRAs. So there needs to be some sort of plan that ties to how you're investing. And that's a telltale sign when I see every account, 70% stocks, 30% bonds, that tells me I'm not sure that a lot of thought has gone into that plan. So that's one example. Another thing to think about is the dollars that you s - that you're gonna need in the next two to three years should not be in stocks. And that is a huge mistake. We use a bucketing method to educate our clients, but you, you shouldn't have money that you're gonna spend in the next, I would say maybe even one to two years in stocks.

Speaker 1: (17:18)
And, and maybe when you're talking three year, four year, five money, I still don't think stocks are an appropriate place, but that's only because stocks have historically fluctuated and had large declines and have stayed down for extended periods of time. It doesn't usually happen, but it can happen. So money you're gonna spend in the short term, one to two years, needs to be rock solid. It needs to be invested in a short term investment. Money that you're gonna spend in year three or four or five years from now needs to be somewhat less volatile than stocks, somewhat more reliable than stocks, but we can take a little bit more risk than we do on our one-year money or our two-year money. So building out this type of investment structure is really gonna protect us against one of the biggest risks out there, which is sequence of returns risk.

Speaker 1: (18:12)
If the market's bad right after you retire, you don't wanna be selling your stocks after they've just taken a 30% decline. That is going to be detrimental to your retirement income plan. And too many people do this, too many people have lucked out in the past, but it's those people that retire and then in 2008 happens, and then they have to go back to work, you know, three or four or five years later or they end up running out of money. That should never happen. Using that bucketing style approach can help prepare and protect really against one of the biggest risk of retirement, which is sequence of returns risk. That is, you retire and the market goes down. You don't wanna be selling stocks when they're down 30, 40%. If you had to do that, that would be absolutely detrimental to your retirement income plan.

Speaker 1: (19:02)
That's where you see when 2008 happens or a, a big market downturn and people retire right before that and then five years later they gotta go back to work or they just ended up running out of money. That, that should not happen. You should have enough defenses in place and a proper retirement income plan in place to protect against that. That's always a possibility. The market can go down and can go down big at any time. You've gotta have a plan to protect against that. That is the number one thing that you've gotta have a plan for when you talk about getting retirement income from investments like stocks, like bonds, investments that have historically generated positive returns given the right amount of time, but also can carry inherent volatility risk. So as we said, to wrap this up, retirement savings and putting money in your portfolio is an entirely different skill than building a retirement income plan and taking money out of the portfolio.

Speaker 1: (20:06)
We've got a complete article on our website, our firm's website at carsonallaria.com. That is C-A-R-S-O-N-A-L-L-A-R-I-A.com, a complete article with other things to think about. These are some frequently asked questions that we hear about how do you turn your retirement income savings or retirement savings into retirement income stream? So I wanted to share that. Again, go to retirementpowerhourpodcast.com. If you heard some questions we talked about today or you've, you've got more questions that we did not answer and you wanna talk further about either, go to the website, click work with me. You can schedule a call. You'll most likely talk to me or a member of our team and we'll walk you through your questions and see if we can help you with that. Again, I, I do appreciate you tuning into this episode and we've got more episodes coming up, uh, more retirement income talk.

Speaker 1: (21:03)
So stay tuned. Thank you for watching the Retirement Power Hour podcast where we help retirees invest wiser and retire better. Take care.

Speaker 2: (21:12)
Thank you for listening to the Retirement Power Hour Podcast. All material discussed on this podcast is for educational purposes only and should not be construed as individual tax, legal, or investment advice. Investing involves risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. Joe Allaria is an investment advisor representative of Carson Allaria Wealth Management, a registered investment advisory firm. Information discussed on this podcast may be derived from third parties that are believed to be reliable, but Carson Allaria Wealth Management does not control or guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Any references to third parties are provided as a convenience and do not constitute an endorsement.