Retirement should be a time to relax and experience the good things of life that you probably missed when you were working full-time.
However, to have a truly good time during retirement, you should know how to generate steady income from your retirement savings.
Consider the following four strategies for more predictable cash flows during retirement.
Prudent systematic withdrawals
No matter how big or small your nest egg may be, it is always a smart strategy to withdraw only the amount you require and allow the power of compounding to work for the rest of your money.
First, carefully determine your monthly cash flow requirements and withdraw only the precise amount each month.
In your 401(k) plan, chances are stocks and mutual funds constitute a large part of the holdings, but you should also take into account the bank accounts, bond investments, and other assets.
A well-considered and properly executed drawdown strategy will allow you to have a stable, long-lasting income stream.
Buy an immediate annuity
One of the simple ways to ensure a lifelong income stream is to buy an immediate annuity.
You can use your savings to invest in immediate annuities. The income flow will begin immediately, and it will be pre-determined and won’t fluctuate, even during periods of market volatility.
While you will have the predictability and financial security in terms of fixed cash flows, you should be aware that your payments will never go up after your buy an immediate annuity.
Most importantly, the decision is irreversible after you sign the contract. The principal amount you invest will be forever locked in once you have purchased an immediate annuity.
Invest in laddered CDs
Building laddered certificates of deposits (CDs) involves investing in multiple CDs with different maturity dates. Each new CD you buy should have a maturity date later than the preceding one.
For instance, one CD may be maturing in one year, the next one in 18 months, and the third one in two years.
With the maturity of each CD you keep buying a new one. This way the ladder gets extended because the new CD will have a maturity date farther out than the previous CDs.
A laddered CD strategy is typically used to meet short-term income requirements, but if the interest rates are high it may also serve the purpose of your longer-term needs.
Purchase laddered bonds
You can buy multiple bonds with staggered dates of maturity. Laddered bonds are designed to reduce your risk, deliver more stable returns, and protect against call risk.
The structure of staggered maturity dates ensures that the risk of all your bonds being called together is eliminated. In general, the interest is paid twice a year with bond investments.
Therefore, if you have a retirement portfolio of just six bonds you could have a consistent monthly cash flow.
At the time you buy the bond, the interest rate will be locked in. So, your income flow during retirement is more predictable with laddered bonds.
The ladder keeps getting extended when you buy a new bond upon the maturity of the previous one. The wide range of bonds in the market will help you construct a bond ladder that is more flexible and balanced.