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3 Retirement Income Challenges You Might Not Expect

When it’s time to make the shift from saving for retirement to living off your retirement savings, what’s the best way to create a steady stream of income that lasts as long as you do?

“If you want your portfolio to go the distance, it helps to have a plan,” says Rob Williams, vice president of income planning at the Schwab Center for Financial Research. It’s not just a matter of selling a few assets and pocketing the proceeds, he says. You need to think about how your investment sales will work with other sources of income, such as dividends, interest, and Social Security, and how they’ll deliver the income you need now and in the future. You also need to continue to monitor—and adjust to—important factors that may shift, such as your expenses, the market, your tax situation, and time horizon.  

Here are three common challenges you might face once you start tapping your portfolio for income.

Challenge 1: Changes in your spending needs  

So much of retirement planning relies on assumptions. How much income you’ll need. How much you’ll earn from your investments each year. How long you’ll live. “You can make educated guesses, but they’re just that—guesses,” Rob says. “And that makes it difficult to know how long your money will really last.”

For example, if you need more income than you anticipated—for health care costs or other needs—how will that affect the longevity of your savings? If you rerun the numbers and discover your savings are likely to fall short, how do you make ends meet without sacrificing your lifestyle in retirement?

It’s also possible that your portfolio may perform better than expected. In that case, you may be able to spend more. Still, it can be difficult to determine if you should increase spending.

“There are plenty of things you can do to accommodate a significant change,” Rob says. “But the challenge becomes figuring out what you should do—and that’s where expert help and a comprehensive retirement income plan that’s updated and revised at least every few years, if not annually, can be helpful.”

Challenge 2: Ups and downs in the market  

No investor wants to go through a market downturn or see their portfolio fall. “But when you’re retired or nearing retirement, it’s particularly scary,” Rob says.

At the same time, you don’t want to reduce your exposure to stocks so much that you inhibit future growth potential. Fortunately, there are ways to help insulate your retirement savings from the effects of a major market decline, while still leaving room for growth.

“One key is a well-structured retirement portfolio that supports your short-term, medium-term, and long-term needs and goals,” Rob says.  

To do this, Rob suggests that you keep a year’s worth of cash in a relatively safe, liquid account for immediate spending, put money you’ll need in the next two to four years in generally more stable investments that tend to hold their value in a down market such as short-term bonds, and invest the rest in higher-earning investments for higher income and stocks for potential growth.

By doing this, you’re giving yourself a cushion—which could help you cover expenses and avoid selling long-term growth investments for quick cash in a down market.

Challenge 3: Minimizing taxes in retirement  

Another common challenge is figuring out how to withdraw money from your retirement portfolio in tax-smart ways.

“The most tax-efficient withdrawal strategy for you will depend on the type of income and assets you have, your specific spending needs, and other factors,” says Hayden Adams, CPA, CFP®, and director of tax planning at the Schwab Center for Financial Research.

While conventional wisdom often recommends tapping taxable accounts first and letting tax deferred accounts (like your 401(k) or traditional IRA) grow until RMDs kick in, a recent study by the Schwab Center for Financial Research shows some investors fare better by drawing down tax-deferred and taxable accounts simultaneously before RMD age.

If your risk of being pushed into a higher tax bracket by RMDs is low, the conventional approach may make sense. “But in cases where RMDs or a future change in tax law could push you into a higher tax bracket and cause a tax spike, drawing down tax-deferred accounts earlier may give you a better outcome,” says Hayden.  

Depending on your specific needs and goals, other tactics—like tax-free withdrawals from a Roth IRA or tax-loss harvesting—may also help you minimize taxes in retirement.

The RMD reality

Many retirees are surprised by the size of their RMDs, especially as they age. Here’s a look at RMDs for accounts of various sizes.

Higher total tax-deferred account balances mean higher RMD owed

Total tax-deferred account balances

RMD required at age:

72

75

80

85

90

$500,000

$19,966

$23,650

$30,837

$39,209

$47,185

$1,000,000

$39,932

$47,300

$61,675

$78,417

$94,369

$1,500,000

$59,898

$70,950

$92,512

$117,626

$141,554

Source: RMD Calculator. This example is hypothetical and provided for illustrative purposes only. It assumes a birth date of 01/01/1949 and 6% average annual returns. RMDs are subject to ordinary income tax rates.

Don’t go it alone

Creating a lasting retirement-income plan requires a fair deal of planning, organization, and oversight to achieve optimal results. But you don’t have to figure it out on your own.

“There are plenty of places to turn for help,” Rob says. “If you prefer a more hands-on approach, consider working with a traditional investment advisor. There are also technology-based solutions, like robo-advisors, that use algorithms based on your retirement income expectations to manage your portfolio for you. The important thing to remember is that the sooner you get a handle on your retirement income plan, the more time you’ll have to make adjustments to help ensure your savings can go the distance and the more confident you’ll likely feel in retirement.”

What You Can Do Next

Important Disclosures

Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs.  Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium® are made available through Charles Schwab & Co. Inc. (“Schwab”), a dually registered investment advisor and broker dealer.

Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. ("CSIA"). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.

Schwab Intelligent Income™ is an optional feature for clients to receive recurring automated withdrawals from their accounts. Schwab does not guarantee the amount or duration of Schwab Intelligent Income withdrawals nor does it guarantee any specific tax results such as meeting Required Minimum Distributions.

Withdrawals from tax-deferred retirement accounts are subject to ordinary income tax. Prior to age 59½, they may also be subject to an early withdrawal penalty.

Roth earnings can be withdrawn tax-free after age 59½, if you’ve held the account for at least five years. 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. 

Investing involves risk including loss of principal.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.
This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, financial planner, or investment manager.

 

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