Retirement should be a time of relaxation and enjoyment, not financial stress. If you’ve diligently saved and accumulated a $500,000 portfolio, congratulations! You’re likely aware that this is a limited amount, however, and should be used judiciously so that you have financially sound senior years. Here are five retirement income strategies for a half-million portfolio.
Assessing Your Retirement Needs
Before evaluating income strategies, it’s necessary to first assess your retirement needs. Take stock of your desired retirement lifestyle, and also review your anticipated life span, potential healthcare costs, and other major financial considerations.
Some of these details require expertise that’s beyond what the average retiree has. A financial advisor can help you anticipate future expenses that you might have to pay later in retirement. They’ll be familiar with common healthcare costs, possible long-term care costs, and other major expenses.
Assessing your needs will allow you to develop a personalized income strategy that uses your $500,000 portfolio to best meet your needs. If you’d like to speak with a financial advisor about how you might best use your portfolio, we can help you find a financial advisor. Answer a few simple questions, and we’ll pair you with a financial advisor who knows retirement.
5 Strategies for Building Your Retirement Income Stream
1. Maximize Social Security Benefits
Social Security can form a significant part of your retirement income. You should have at least some benefits so long as you’ve worked in the U.S., and your benefits could easily be four figures per month.
Delay Social Security Payments
To maximize Social Security payments, consider delaying your claims. You can generally start receiving payments at age 62, but waiting should increase the payments. See if you can’t wait until full retirement age (66 or 67 for most), and you may want to even wait until 70 if you can.
Social Security payments normally increase if they’re delayed, up to age 70. There’s currently no increase after 70, so it makes sense to begin taking them by then if you don’t earlier on.
If you’re working with a $500,000 portfolio, delaying Social Security payments can help you have a larger guaranteed income later on. You might not want to focus on how you can most likely receive the maximum from Social Security, but rather what strategy will give you the greatest piece of mind if your nest egg is partially used for a major expense. Getting the highest possible payment usually provides the best piece of mind.
Manage Finances Now
There are a couple of ways that you may delay payments even if you’re currently on a tight budget. For instance, you might:
- Continue Working: Working even part-time can provide a good supplemental income for now, especially since the currently tight labor market is forcing many employers to pay good wages. Working full-time might increase your Social Security payments if you didn’t work for a while (e.g. were a stay-at-home parent).
Depending on your skill set and interests, you may be able to consult or otherwise use your expertise and experience. You could also use this opportunity to work in another field where you have an interest, or even travel while you work. - Draw on Other Sources: It might be prudent to draw from other financial resources before taking Social Security.
This decision is highly situation-specific, however, and shouldn’t be done without knowledge of retirement accounts. Discuss your options with a knowledgeable financial advisor, before deciding to use Social Security or another source. - Delay Expenses: If you’ll eventually have to pay for one or more major expenses, consider delaying them if possible. You might put off purchasing a different car, for example. Also consider whether there’s anywhere you could trim your budget.
Calculate Potential Social Security Benefits
Part of making an informed decision with regard to Social Security is knowing how much more you’d receive by delaying. A financial advisor can run calculations for you, checking what you’d receive if you began taking payments at different ages. We can help you connect with a qualified financial advisor if you don’t currently have one.
2. Build a Sustainable Withdrawal Rate
You’ll probably need to supplement Social Security payments with withdrawals from your own $500,000 savings.
It’s generally wise to withdraw at a rate which hopefully doesn’t decrease your principal. If you can withdraw but maintain $500,000 in your retirement accounts, you may still have the same savings for the future.
Sometimes people use the 4% guideline for sustainable withdrawals. This guideline uses historic data to estimate that withdrawing 4% of your portfolio probably won’t decrease your total principal. If you have a $500,000 portfolio, a 4% withdrawal would be $20,000 per year.
No one should blindly follow the 4% guideline. What a sustainable withdrawal rate would be for you depends on how your portfolio is invested, your risk tolerance, and future returns.
Consult a financial advisor who can help you determine a good withdrawal rate for your specific situation. They’ll be able to look at different scenarios, and how different withdrawal rates would impact your savings in those various scenarios.
An advisor can’t guarantee that a withdrawal rate will be perfect in every situation, but they can give you the knowledge necessary to make an informed decision as to how much you might withdraw annually. For help making this and other decisions about your retirement portfolio, you can use our free financial advisor match tool to find someone.
(There’s always risk when investing, and returns aren’t guaranteed. Past performance isn’t indicative of future results.)
3. Utilize Retirement Accounts Strategically
When you go to make withdrawals, where you withdraw from can have major tax implications. You’ll want to utilize your retirement accounts in such a way that tax savings is maximized, and your total tax liability is minimized.
Which accounts you should withdraw from is a complicated matter. This is something that should be reviewed with a financial advisor, who can help you decide whether to withdraw from a cash account. Traditional IRA, Traditional 401(k), or other retirement account.
It’s usually best to draw from Roth IRAs and Roth 401(k)s last, because of the tax advantages that Roth accounts have. Usually it isn’t always, though, and this decision should also be made in concert with a financial advisor’s guidance.
4. Create a Retirement Portfolio for Growth
While preserving your capital is essential, allocating a portion of your portfolio to growth-oriented investments can help combat inflation and potentially increase your income over time. Consider diversifying your investments across different asset classes, such as stocks, bonds, and real estate, to mitigate risk and increase potential returns.
Because increased potential returns often correspond to increased returns, you should talk with an advisor about how to responsibly structure any growth portion of your portfolio. They can explain the potential risks and rewards of different growth-focused investments.
5. Explore Annuity Options
Annuities can provide a guaranteed income stream, serving as a pension-like supplement to your retirement income. Fixed annuities, in particular, offer regular, predictable payments, regardless of market conditions. Some annuities also may provide investment returns.
Supplementing Social Security with additional guaranteed income from a fixed annuity might increase your peace of mind.
Additional Considerations When Planning Your Retirement Income
Managing your retirement nest egg isn’t just about meeting today’s needs, but also considering tomorrow. There are a few major additional considerations:
- Healthcare Costs: Healthcare expenses can significantly impact your retirement finances. Plan for potential medical costs by factoring in Medicare premiums, supplemental insurance, and long-term care options (insurance or other).
- Inflation: The rising cost of goods and services can erode your purchasing power over time. Factor in inflation when calculating your retirement income needs and target returns. Adjust your withdrawal rate accordingly.
- Taxes: Understand the tax implications of your different retirement accounts and investment strategies. Consult a financial advisor and/or tax professional, to optimize your tax efficiency and minimize your tax burden in retirement.
- Estate Planning: Create a comprehensive estate plan to ensure your assets are distributed according to your wishes after you pass away. You might want to use a will, trust, or other estate planning method.
Navigating Retirement Income Risks
It’s also important to be aware of the risks that affect your potential retirement income. While not a comprehensive list, the following are some risks that need to be evaluated:
- Longevity Risk: The risk of outliving your savings. Consider strategies like delaying Social Security, purchasing annuities, or investing in long-term care insurance to mitigate this risk.
- Market Volatility Risk: The risk of market fluctuations impacting your investment returns. Diversify your portfolio across different asset classes to reduce your exposure to any single market or sector, and consider your risk tolerance when selecting an investment strategy.
- Inflation Risk: The risk of rising prices eroding your purchasing power. Invest in assets that have the potential to outpace anticipated inflation, which could be stocks, mutual funds or real estate.
- Withdrawal Rate Risk: The risk of withdrawing too much from your portfolio too soon, depleting your savings prematurely. Stick to a withdrawal rate that’s projected to be sustainable, and be conservative when withdrawing if possible.
The counters won’t eliminate any of these risks. They could help mitigate the risks, however, especially if done in an informed way. A financial advisor can review how each risk might be countered, and also other risks not listed here.
How a Financial Advisor Can Help
A financial advisor can be a great asset when deciding how to draw income from a $500,000 portfolio. They can offer personalized advice tailored to your financial situation, help you navigate complex financial decisions, and adjust your plan based on changing economic conditions and personal circumstances.
In short, a financial advisor can help you decide how to responsibly manage your nest egg, for an expected financially sound retirement that lets you have fun and sleep at night.
Talk with a Financial Advisor
To talk with a qualified financial advisor who understands these strategies for managing income with a $500,000 retirement portfolio, you can use our matching tool. Answer some basic questions about your financial goals, and we can find you someone who’ll walk through the many decisions to be made when planning retirement.
