Turning on the retirement income spigot

If you've saved an adequate amount of money to comfortably fund your retirement, you probably think you are in the home stretch. The only thing left to do is sit back and enjoy your nest egg, right? Not so fast. You may still have to navigate some rough waters, so it may not all be smooth sailing.

For one, you will still have to manage your savings to yield the income you desire to finance your lifestyle.

Financial planners favor three main approaches to converting retirement savings into retirement income: probability-based, safety first and using "buckets." A less common strategy involves weighing utility. Click on the tabs to learn about how they work.

Safety-first approach

That's why advisers such as Hogan favor an approach that is geared to meeting essential needs before taking care of discretionary spending. As Hogan sees it, you have only one shot at retirement and you want it to absolutely go right, rather than expecting it to probably go right.

Yield sign on a desert road © Nickolay Stanev/

The safety-first approach is geared to how people use their limited resources to obtain the most satisfaction across their lifetimes. It aims to match spending for the preferred standard of retirement living with the right asset to fund this liability.

Most people have a base layer of Social Security, so this approach typically uses other assets to supplement income with a lifetime inflation-protected income, such as inflation-protected immediate annuities. With a lump-sum investment, you basically buy yourself a lifetime income with immediate annuities. A Treasury inflation-protected securities ladder paired with an annuity is another option.

Once those basic needs are taken care of, the rest of the retirement portfolio would be allocated to other investments based on a person's risk tolerance.

This approach is not without shortcomings, either. "The problem with annuity companies is that they don't fail until they do," says Kitces. "It's very binary. Annuity companies are regulated pretty well, so they don't really fail very much at all, particularly the large, secure ones. But you don't have a lot of control or alternatives if they are in trouble."

Another disadvantage is that it can be costly to build a secure floor, and you could lose upside potential if you buy annuities and don't have much exposure to higher-risk investments. Ultimately, it means that it could be harder to meet your more discretionary lifestyle goals.

"Look at what Treasuries are paying today," says Evensky. "You would have to be sufficiently wealthy to be able to hit any kind of a reasonable threshold on that, no matter what your minimum goals. So it sounds very good to a retail client, but if anyone sits down and looks at the impact on their quality of life, they are not going to find it particularly acceptable."


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