- Use just the interest and dividends from a portfolio balanced between stocks and bonds.
- Invest your retirement savings and withdraw interest and dividends, plus draw down principal cautiously so that you don't outlive your savings -- also known as managed payouts.
- Buy an immediate annuity.
If: You don't want to outlive your retirement savings, (i.e you want to avoid "longevity risk")...
Then: Consider using interest and dividends only, or buying an immediate annuity.
If: You want to protect yourself against the risk of inflation...
Then: Consider investing in a portfolio with a significant portion in stocks or Treasury Inflation Protected Securities (TIPS), and use interest and dividends only or managed payouts. You can also invest in an inflation-adjusted or variable immediate annuity.
If: You don't want to be wiped out by stock market declines (i.e., you want to avoid "investment risk")...
Then: Invest a significant portion of your portfolio in bonds, and use interest and dividends only or managed payouts. You can also invest in a fixed or inflation-adjusted immediate annuity.
If: You want to maximize your retirement income over your lifetime...
Then: Invest in any type of immediate annuity, which devotes all your principal to generating retirement income. Or invest a significant portion of your retirement savings in stocks, use managed payouts, and hope that stocks will generate returns over your retirement years that are higher than other investments.
If: You want to be able to have access to some savings in the case of an emergency or unexpected expenses...
Then: Use interest and dividends only, or managed payouts.
If: You don't want to devote a lot of time or expertise to managing your retirement savings...
Then: Buy an immediate annuity. Automatic deposit of a paycheck each month provides the ultimate in low-maintenance. If you want to use interest and dividends only or managed payouts, then consider a highly rated, no-load mutual fund that is balanced between stocks and bonds. (As you get older, this goal can take on increasing importance.)
If: You want to leave a legacy for your children or charities...
Then: Use interest and dividends only, or managed payouts with a very conservative withdrawal rate.
As you can see, there's no one solution or product that can satisfy all these objectives at the same time. In order to reach your goals, you've probably got to make some tradeoffs, or at least use a combination of methods.
And your goals can change as you age. For instance, you might like to use the interest and dividends method in your sixties and seventies only, particularly when you might work part-time to supplement your retirement income. Then, when you get into your eighties, you may desire low maintenance, predictability, and protection against longevity risk, which would call for investing in an immediate annuity.
If you invest the time now to learn how to generate a retirement income that best meets your retirement needs, then you'll have the peace of mind to focus on what's really important -- the rest of your life!
More on MoneyWatch:
- IRAs and 401k: 3 Ways to Generate Lifetime Retirement Income
- IRAs and 401k: Generate Retirement Income with Just Interest and Dividends
- IRAs and 401k: How to Generate Retirement Income with Managed Payouts
- IRAs and 401ks: Maximize Retirement Income with Immediate Annuities
- IRA and 401k Retirement Income: How You Can Get Both Predictability and Flexibility