Posted by Michelson Law Office

How to Turn Your Pension Cash into Retirement Income

How to Turn Your Pension Cash into Retirement Income

Retirement is said to be the light at the end of the tunnel and most of us envision it as a time of rest and relaxation after a lifetime of working and saving. This is best especially at times that we enjoy the fruits of our labors and having a steady source of income without needing to work each day.

During our working years, it tends to be a murky concept from us to generate income without going to work. But as to how it will happen seems to be the big question now since we only know what we want but aren’t totally sure how. Now to answer the question, using the income sources, it will be a big help for you to develop a concrete strategy based on it. So how exactly to achieve a steady flow of cash during your retirement years from your nest egg?

Immediate Annuities

For you to have an easy way to convert a lump sum into an ongoing income stream that you can’t outlive, you really have to purchase an immediate annuity. Taking the money you saved up during your working years and using it to purchase an immediate annuity contract is the best thing that retirees can do since the income stream starts immediately. Predictably, you will not be affected by falling stock prices or declining interest rates anymore.

The mere fact that income payment will never increase which means it decreases in value over time due to inflation must be a fact to accept by an immediate annuity buyer in exchange for the cash flow and security. Once you buy one, you cannot change your mind. Your principal will be locked in forever and even after death; the insurance company keeps the balance remaining in your account. This is the greater concern for most immediate annuity purchasers.

Hence, before you rush out and buy one, do your homework well since annuities come in a variety of forms and are complicated products for you to look upon.

Strategic Systematic Withdrawals

It is really not a good strategic method in maximizing or safeguarding your income stream to just let your million dollars sit in your bank account and take it all out at once and stuff it in your mattress. Instead, a wise strategy tells you to take out only the amount of money you need and let the rest continue to work regardless of how small or big your nest egg is. The essence of a systematic withdrawal strategy comes when you figure out your cash -flow needs and take out only the amount of money on a regular basis. For you to be sure, if your withdrawals don’t match your needs, well it isn’t strategic. But if you only take out the same amount of money each week or month, then it can be categorized as systematic. 

Liquidating your assets over time as part of a systematic withdrawal program is one way or another what most people implement. The largest pools of money of equity holdings such as mutual funds and stock in 401 (k) plans are tapped in this manner but for bonds, bank accounts, and other assets, this should be considered as well. And to ensure that your income stream lasts as long as you need it, a properly implemented drawdown strategy would be of help.

Craig L. Israelsen, Ph.D., a designer of 7Twelve Portfolio basing in Springville, Utah has given his statement for retirees who are pulling retirement money out of traditional IRAs (not Roth IRAs), 401 (k) s and 403 (b)s saying that the right withdrawal amount is determined by the required minimum distribution, or RMD and  not according to their decision. RMD, starting at age 70 ½ requires generally smaller withdrawals during the first five to six years (roughly at age 76). Annual RMD- based withdrawals will be significantly larger for the remainder of the retiree’s life after six years.

Laddered Bonds

Created through the purchase of multiple bonds are Bond ladders that mature at staggered intervals. Consistent returns, low risk of loss and protection from call risk are provided in this structure as well as the staggered maturities which eliminate the risk of all the bonds at the same time. Since a six-bond portfolio would generate steady monthly cash flow, it will generally make interest payments twice a year. There, the periodic interest payments are predictable and unchanging as the interest rate paid by the bonds is locked in at the time of purchase. 

As the maturity date of the new purchase occurs further in the future than the maturity date of the other bonds in the portfolio, another is purchased and the ladder is extended when each bond matures. Considerable flexibility in creating a bond ladder is provided when there are a variety of bonds available in the marketplace and issues of varying credit quality are made used in constructing portfolios.

Laddered Certificates of Deposit

A ladder that mirrors the technique for building a bond ladder is the construction of a certificate of deposit (CD). With each CD maturing later than its predecessor, multiple CDs with varying dates are purchased. In six months, one CD might mature with the next maturing in one year and the next to mature in 18 months. The ladder is extended when you purchase a new one since the maturity date of the new purchase is farther in the future than the maturity date of the previously purchased CDs as each CD matures.

Planning should take place if you want a steady source of income possible. And when the time comes to draw down your funds, save diligently, invest conscientiously and determine the best pay-out options.

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