Many people wonder how to manage retirement funds in ways that create a steady income stream that will last throughout their retirement. However, with the right strategies, it's possible to pursue financial stability without outliving your savings. With a little planning, you can create a sustainable retirement income stream that includes annuities, dividend-paying stocks, and the 4% rule.

Annuities to Guarantee Income for Life

Annuities are a popular choice for retirees seeking guaranteed income. These financial products are typically purchased from insurance companies and can provide you with a steady, predictable cash flow.

There are two types of annuities. Immediate annuities require you to invest a lump sum in exchange for monthly payments that begin right away. Deferred annuities allow you to start payments at a future date, allowing your investment to grow tax-deferred.

Annuities offer many retirees the peace of mind that comes with knowing you'll receive income for life. This is especially helpful if you’re worried about outliving your savings. However, they do come with downsides, such as fees and limited liquidity. Before purchasing an annuity, it’s essential to carefully consider the terms and fees.

Dividend-Paying Stocks as Income Generator

Dividend-paying stocks offer a combination of income and potential growth. Many established companies distribute a portion of their earnings to shareholders in the form of dividends. These dividends can be a source of reliable income, even if stock prices fluctuate.

Dividend-paying stocks may provide a steady income. Even during market volatility, many companies maintain consistent dividend payments. Stock prices may appreciate over time, boosting the value of your investment. In some cases, qualified dividends are taxed at a lower rate than ordinary income.

Investing in dividend-paying stocks can be an excellent strategy for retirees who want income along with potential capital appreciation. Keep in mind, though, that stocks do come with risks, and it’s important to diversify your portfolio to reduce the impact of market downturns.

4% Rule to Extend the Life of Your Portfolio

The 4% rule is a widely used guideline for determining how much you can withdraw from your retirement savings each year without running out of money. The rule suggests withdrawing 4% of your total portfolio value in the first year of retirement and then adjusting for inflation each year after that.

For example, if you retire with $1,000,000, you would withdraw $40,000 in the first year. In subsequent years, you adjust this amount based on inflation.

This rule provides a straightforward framework for managing withdrawals, and this kind of disciplined withdrawal rate has helped retirees maintain income for 30 years or more.

However, the 4% rule isn't foolproof. It assumes stable market conditions and doesn't account for major economic downturns or personal expenses that may arise unexpectedly. You may need to adjust the percentage based on your risk tolerance and current market conditions.

Diversification for a More Sustainable Income Stream

Each of these strategies—annuities, dividend-paying stocks, and the 4% rule—has its strengths and weaknesses. The most effective way to create a sustainable retirement income stream is often to combine multiple strategies.

For example:

• Use annuities to cover essential living expenses.
• Supplement this with income from dividend-paying stocks to cover discretionary spending.
• Implement the 4% rule for your remaining portfolio to help your savings last.

Talk to a Financial Advisor

By diversifying your income sources, you reduce the risk of relying too heavily on one strategy. This balanced approach can help you maintain financial security and flexibility throughout retirement. A financial advisor can help you make decisions that are the best match with your goals, your income, and your tolerance for risk. If you'd like to learn more, contact Mark Vergenes today.

Investments in securities do not offer a fixed rate of return. Principal, yield, and/or share price will fluctuate with changes in market conditions and when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results. The guarantee of the annuity is backed by the claims paying ability of the issuing insurance company.