After a successful career full of hard work, you’ve earned the right to enjoy your retirement. Yet turning retirement savings into retirement income isn’t always so easy.

For one, like many retirees, you may need to sell investments in a retirement portfolio to convert to cash, and you’ll need to determine which investments to sell. On top of that, you’ll need to withdraw savings in a way that turns your nest egg into lifetime income, rather than taking out too much early on and running out of money later in your retirement. 

Whether you are preparing for retirement or are already retired, consider the following areas to figure out a comfortable withdrawal rate and know when to leverage different income streams:

Retirement Accounts

The first step in turning retirement savings into retirement income involves analyzing your different sources of retirement savings. These can include retirement plans such as 401(k)s and IRAs. They can also include pensions such as for special risk employees in the Florida Retirement System.

You can also factor in other areas like brokerage accounts or savings accounts. They may not be earmarked specifically for retirement, but they can still be used to generate retirement income.

From there, you can calculate how much income you would have and for how long at different withdrawal rates. For example, if you have $1 million saved in a 401(k) and withdrew 4% per year by selling off some of your investments, the account will provide you with $40,000 in annual income from that source alone. 

To do so, you might sell off an amount proportional to your investment allocations. For example, if 75% of your investments are in domestic fixed income and 25% are in international fixed income, you would sell off $30,000 worth of domestic bonds and $10,000 worth of international ones. This can be a complex decision, however, and you might appreciate the expertise of a financial advisor. 

Even without any investing, this $1 million balance with a 4% withdrawal rate would last 25 years. But depending on your investment strategy and market performance, you may be able to turn this principal balance into lifetime income without drawing down your principal too much, as you may be able to earn close to a 4% return per year through relatively conservative investments. Depending on your retirement balance, income needs, investment strategy, etc., you can tweak your withdrawal rate accordingly, as 4% won’t work for everyone.

With pension funds, your retirement income may be clearer, as your pension provider may have defined payouts based on your work history. Still, there can be significant variables to consider that affect your retirement income, such as the age at which you retire.

Projected Expenses and Taxes

To clarify your ideal withdrawal rate, it helps to build a retirement plan that includes projecting your expenses in retirement. By accounting for housing, transportation, entertainment, etc., you can get an idea of how much annual income you need to cover those costs.

Then, after taking into account other income sources such as Social Security, you can see how much you would need to withdraw each month or year to cover your expenses. You also want to make sure that you can afford health care expenses not covered by Medicare. That may require using a conservative withdrawal rate so that you have a high enough retirement savings balance to cover unforeseen or irregular costs. 

Keep in mind that different types of withdrawals can also have different tax consequences. For example, turning retirement savings into retirement income from a Roth IRA would not generate any taxes (assuming applicable Roth rules are followed), whereas when you withdraw from a 401(k), you pay ordinary income taxes on the amount you take out. 

If you have different buckets of retirement savings, you can use tax-efficient withdrawal strategies, such as taking more from Roth accounts in years when taxes are high and taking more from traditional retirement accounts in years when taxes are low.

For instance, the Tax Cuts and Jobs Act lowers income tax rates from 2018 to 2025. This period might be an ideal time to withdraw from accounts that generate income taxes; then, assuming that rates will go up again after 2025, that might be a good time to take from Roth accounts.

Life Expectancy and Estate Planning

Lastly, turning retirement savings into retirement income may involve estimating your life expectancy and thinking about whether you want to pass on money to heirs. If you’re worried about running out of money, you might be drawn to products like annuities, which generally require paying a lump sum to then have a guaranteed income stream.

However, these products are often costly and might not yield as much retirement income as other strategies. For example, you could withdraw only as much as you earn from interest and dividends so that you can keep your investment balance in your retirement accounts, and then you could have a larger lump sum to pass on as an inheritance.

Conversely, if you retire later in life and think you may have a limited time to enjoy your savings, you may be willing to use a higher withdrawal rate, even if that means having less money toward the end of your life.

Consider Working with a Financial Advisor

In some ways, turning retirement savings into retirement income seems relatively straightforward—sell investments, withdraw cash, and collect income streams such as pension payments and Social Security to use to fund your retirement lifestyle. 

However, there can be a lot of nuance in deciding which investments to sell, when to start collecting retirement benefits, how to minimize the tax consequences of withdrawals, and figuring out a comfortable withdrawal rate. And you may find that you lack the expertise, time, or desire to manage these intricacies. Working with a financial advisor you trust could make a big difference in your retirement planning and your confidence.

As a fee-only, fiduciary financial planner in Plantation, FL, we provide objective advice to help pre-retirees and retirees figure out how to turn retirement savings into retirement income as part of their overall financial plan. 

Schedule a complimentary consultation with a fee-only financial planner to discuss your personal situation.

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.