Four roads to retirement income

The following column was published in The News Star on Saturday, January 4, 2014.

Question: I will be retiring in a few years. I will have Social Security, money in my 401(k), some company stock I’ve acquired over the years and some cash. I think I’ll have enough, but I am not sure the best way to take out money when I need it. What’s the best way to take it out?

Answer: The best way is whatever method works best for you. It doesn’t matter what anyone else does.

When it comes to drawing money out of your various 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 by 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.

Interest only. This used to be the most common way retirees would tap into their savings. Funds might be deposited at a bank in 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 only interest as income) has proven to be not (always) so safe.

Spend down. The second method involves spending not only the interest, but also chunks of principal. Obviously this means more income to spend…at first. Equally obvious, 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 the final two methods and see when any one (or combination) of the methods might be appropriate for you.

Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Email him at bmoore@argentmoney.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc.  No forecasts can be guaranteed.  Argent Advisors, Inc. does not offer tax, insurance or legal advice.  The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.