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Nine Fundamentals for Generating Income in Retirement

Key Points
  • Have a plan to move from saving to spending as you transition to and live in retirement.

  • Following nine fundamentals can help you create a sound, long-lasting income plan.

  • Helpful information for anyone in or approaching retirement.

So you've saved diligently and carefully for retirement—now it's time to turn your savings into income. The transition from saving to living off of your nest egg may seem difficult at first, so this article will give you some fundamentals and steps to help. By following these nine fundamentals, you'll take control of your retirement and create a solid retirement income plan.

Of course, no single path will fit every investor. This is especially true when shifting to living in retirement from saving for it, when there are different sorts of challenges. But everyone should start with a plan, and then stay flexible.

Fundamental #1: Review your situation.

Know where you are before you decide where you're going. Determining exactly what you have is a great place to start, no matter your situation. And you'll be well ahead of the majority of retirees if you take the time to figure out what you've got before making any big decisions. No matter what you've already saved, you need to take a careful look at what you have, where you have it, and what you expect to spend.

Do you have enough? Based on what you have, how do you create an income plan?

Think carefully about what you currently spend, and plan for "must haves" (what you really need) and "nice to haves" (what you've worked hard to have so you can live a comfortable retirement). Breaking out a budget this way, and looking at your existing portfolio and income sources, can help you create an investment plan.

Next steps:

Fundamental #2: Maintain a year of cash.

Every good plan starts with the question, "What do I need now?" Then you can plan your investments to keep up with your lifestyle, inflation, unexpected future expenses or the "nice to haves" later in retirement. Set aside enough cash to cover your spending needs, after non-portfolio income sources like Social Security or a pension, for the next 12 months.

Treat this money as "spent." It's the first "bucket" of your cash-flow plan—a cash reserve for your current expenditures. The second bucket will be the rest of your portfolio.

Consider putting this cash into a single, easily accessible place. This could be a checking account, a money market account or a combination of accounts, maybe even short-term certificates of deposit (CDs), depending on your personal preferences. This money can be invested to seek to generate a bit of return, but that's not its primary purpose—it's there to help meet your expenses throughout the year.

Next steps:

Fundamental #3: Consolidate income in a single account.

Income sources could include Social Security, a pension or other non-portfolio sources. This account should be the first source of cash flow to support your expenditures. You may also choose to deposit portfolio income (such as interest and dividends on stocks and bonds, dividends paid from mutual funds or periodic IRA withdrawals) into this account as well.

Your personal preference may be to continue reinvesting those interest and dividend payments, taking withdrawals when you need them or based on a systematic withdrawal plan. That's okay too—some investors prefer that approach. But building more predictable portfolio income sources to support your cash-flow needs can be a good first line of support to your income plan. We'll cover this more in fundamental #5.

For now, depositing any regular sources of income you rely on into an easily accessible place makes it easier to measure your cash flow and track income and spending over time.

Next steps:

Fundamental #4: Match your investments to your goals and needs.

You've already saved to get here, so you most likely have a plan for your investments, including an asset-allocation plan that makes sense for you. You don't necessarily need to change that now, but it's a good time to revisit it.

Now that you've set aside a cash cushion, you can redirect your focus back toward staying invested for the long haul. We recommend that investors entering retirement start with a moderate allocation—a mix of roughly 60% stocks and 40% bonds and cash investments.

The combination of stocks and bonds, along with an appropriate allocation to cash investments, can help protect you against market volatility while keeping you invested for long-term needs. Bonds provide a cushion that's generally less volatile than stocks and provide a regular source of income. Stocks provide potential for growth, as well as dividends that may increase over time.

If you have a shorter time horizon or are less comfort with market risk, consider a more conservative allocation. Unless you have large estate or bequest motives, you'll want to adjust your allocation to be more conservative over time.

Next steps:

  • Schwab clients can analyze their portfolio using a Schwab Portfolio Checkup
  • Try to build your retirement portfolio for the long term.

Fundamental #5: Cover essentials with predictable income.

Now you can start to look at individual investments in your portfolio to put them to work for you. Some retirees may choose to take a systematic approach to planning withdrawals from their portfolio, whatever the source. It could be capital gains, interest and dividends, or cash.

Others choose to build up more predictable sources of portfolio cash flow, starting with regular interest payments from bonds and other fixed income investments. Having these relatively predictable sources of income can help increase confidence in an investment plan and build a solid "baseline" of income to support your needs.

Bonds and fixed income investments, as well as any returns on cash investments such as money market funds or CDs, are generally the first source of predictable income for most portfolios. Consider dividend-paying stocks as well, either though income-oriented stock mutual funds or individual blue-chip stocks, to add fluctuating income sources of income that can grow. This will be part of your allocation to stocks, based on your risk tolerance.

Stocks will be more volatile, generally, than more conservatively invested bonds. Even blue-chip stocks bought at a good price can be volatile, and they don't promise to pay a fixed amount at maturity. But they can also grow to help cover discretionary expenses and future income needs.

You may also add annuities that pay out guaranteed income for a lump sum (immediate fixed annuities) or that guarantee a fixed withdrawal rate on a portfolio that stays invested (variable annuities with guaranteed living benefits) to help create reliable cash flow.1

Next steps:

  • Consider what role fixed income should play in your retirement portfolio.

Fundamental #6: Don't be afraid to tap into your principal.

Some retirees with very large portfolios may be able to live comfortably just off interest and dividend payments spun off from predictable income sources alone. But that's difficult to achieve unless you have a very large portfolio, especially in a low-interest-rate environment.

Most folks may need to tap into a portion of the money that's been saved to support their cash-flow needs. Having a portfolio well-balanced among stocks, bonds and cash investments, and knowing when to use those investments, can help you tap your portfolio appropriately.

This gives you more control and can reduce uncertainty caused by interest rates or market conditions. It will also help you stay invested in an appropriate mix of investments for money that will be needed later. The key is to have a smart way of tapping your portfolio, to keep your investments working for you.

Next steps:

  • Review income approaches
  • Learn how you can generate cash flow from your retirement portfolio.

Fundamental #7: Follow a smart portfolio drawdown strategy.

If you've created some predictable sources of interest and dividend payments from your bond and stock portfolio, you've started to lay the baseline for a tax-efficient drawdown strategy. These can be the first source of withdrawals from your portfolio, if you haven't chosen to reinvest them.

The next source of withdrawals, if needed, can be principal from maturing short-term bonds, CDs or cash investments. Consider investing two-to-four years' worth of annual expenditures in a short-term CD, bond ladder2 or short-term bond funds (which are generally less volatile than stocks, or intermediate or long-term bonds). When bonds or CDs mature, you can tap the proceeds first or withdraw funds from short-term bond funds.

You should also watch for other tax issues, such as required minimum withdrawals (RMDs) from IRAs, or capital gains (or losses) on other investments in taxable accounts.

Next steps:

Fundamental #8: Rebalance to stay aligned with your goals.

Part of a tax-smart drawdown strategy will likely involve regular re-balancing. You may sell investments that have appreciated in value to generate cash. But you'll still want to make sure you re-balance at least annually to stay in line with your longer-term goals.

Your needs, risk tolerance and time horizon may change as well. So now's a good time to make sure your targeted balance between stocks, bonds and cash still makes sense for you. And you can use Schwab's retirement tools to make sure you're still invested in a way that balances your risk tolerance and cash-flow needs.

Next steps:

  • Do your best to build your retirement portfolio to last.

Fundamental #9: Stay flexible and re-evaluate as needed.

Fundamental #1 was to review where you are currently. This process will continue throughout your retirement. Your new life of living off your nest isn't a single point in time, where you create a plan, set it and forget it.

You'll want to continue to watch and revise your plan as needed. When markets are down, you may choose to reduce your discretionary spending, or you may wish to change your balance of stocks and bonds to decrease risk in your portfolio over time. You may also consider annuities, which can act like a personal pension by turning a portion of your investments into lifetime income or can help to provide a reliable, guaranteed source of portfolio withdrawals.1 All annuity guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company. Schwab does not provide any insurance guarantees.

If you follow these fundamentals, stay flexible and re-evaluate annually, you'll be on the path to a solid retirement income plan.

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Important Disclosures

Variable annuities are sold by prospectus only. You can request a prospectus by calling 1-888-311-4887 or by visiting Before purchasing a variable annuity, you should carefully read the prospectus and consider the investment objectives and all risks, charges, and expenses associated with the annuity and its investment options.

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. Investment value and return will fluctuate such that shares, when redeemed, may be worth more or less than original cost.

Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.


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