Creating Your Retirement Paycheck
Your portfolio needs to switch from getting you to retirement to getting you through retirement.
By: Edward Jones
When this happens, Edward Jones believes a more balanced mix between equities and fixed income is appropriate. You still need growth because inflation doesn't retire – but you also need investments designed to help provide for your current income needs and provide more stability.
Each investment plays its part
Each investment within your portfolio can serve a valuable role, not just from a diversification standpoint, but also for providing for your income needs in retirement. Interestingly, as your needs change as you enter retirement, that role – and the type of investments you own – may change as well.
• Cash and short-term fixed-income – Your strategy may be very different in retirement, when you are now relying on them to provide for your income in retirement. Edward Jones recommends having a year's worth of income needs from your portfolio in cash, as well as three to five years' worth of income needs in the form of a short-term fixed-income or CD ladder.1 Your cash and short-term fixed income can be used to provide for your near-term needs – your current income needs and those over the next several years – as well as providing some stability to your portfolio.
• Bonds and other fixed-income investments – These can also provide a fixed stream of income and provide for your income needs over the intermediate term. We recommend considering a laddered portfolio of individual bonds or bond mutual funds to round out your fixed-income portfolio*, in addition to the short-term fixed income I just mentioned. Your financial advisor can help you set up this ladder if you are using individual bonds.
• Stocks and other growth investments – These are designed to provide growth and rising income potential to help outpace inflation and provide for your income needs years from now. The equities you own may lean toward larger, higher-quality dividend-paying companies and those with the potential to increase their dividends over time, which helps provide rising income.2 That said, we still recommend investing in small and mid-size companies – for diversification purposes and to provide growth potential for your needs down the road.
A guide for withdrawals
We recommend the following sequence as a general guide:
1. Start with your outside sources of income, such as Social Security or any pensions you may have.
2. Then factor in withdrawals from any annuities with lifetime income that you might have.
3. Next, look at any required minimum distributions you might need to take from an IRA.
4. Then use dividends and interest from any taxable accounts, including municipal bond interest.
5. And finally, add the proceeds from maturing investments, such as a CD ladder, or investment sales.
This sequence is just a guide – the accounts and investments you use may vary from year to year, depending on your investment and tax considerations. You'll want to talk with your financial advisor and tax professional before making any decisions.
The effects of market performance
During down markets, your emotions may be telling you to make changes and potentially sell stocks. But keep in mind that stocks are there to provide for your long-term income. Your near-term income needs are already addressed by your cash and short-term fixed-income ladder, so you can spend from them, allowing your stocks the time to potentially recover from these declines.
When markets are up, you could cover some of your current expenses through the growth of your portfolio, as you may end up being overweight in stocks. You could also use this growth to "restock" your cash and short-term ladder. Rebuilding your ladder can help you prepare for those inevitable down years, whenever they may occur.
1 You must evaluate whether a bond or CD ladder and the securities held within it are consistent with your investment objectives, risk tolerance and financial circumstances.
2 Dividends can be increased, decreased or eliminated at any time without notice.
This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.
Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal.
Edward Jones - Mae Luchetti