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Retirement Income Strategy

Since no one knows what the future holds for interest rates, the markets or inflation, it is important that your future income is diversified properly and you have enough cash on hand so you are not dependant on factors you cannot control. This can also provide confidence that you will have the income you will need for the rest of your life.

There are several strategies that can work, depending on your risk tolerance and outside sources of income such as pension, social security, etc.

One Strategy To Consider is This:

   #1   Break down your financial needs into three categories:

a)     Required annual expenses: food, clothes, taxes, medical insurance, electricity, heat, etc. (be sure to include an additional amount to allow for estimation errors and as a cushion to maintain your cash reserve)

b)    Variable annual expenses: travel, entertainment, newspapers, gifts, donations, etc.

c)     Large expenses not in your annual budget: major home repairs, replace your car, etc.

#2  Determine the amount of income you need your investment portfolio to provide:

a)     Add up the total of your required and variable expenses.

b)    Add up your outside income sources: pension, social security, etc.

c)     Subtract “b” from “a”.  The result is the amount you need your portfolio to provide.

#3  Maintain a cash reserve of approx. 3-6 months of total expenses (“a” above).

#4  Carve out of your portfolio the annual amount needed (“c” above) and multiply it by three. Carve out an additional amount for the large expenses that are not in your regular budget.

  • Put this amount in cash and cash alternative investments. Although the return may be very low, this will assure that regardless of the markets or interest rates you will have your income covered for the next three years.

#5  Invest the remaining assets in a well diversified portfolio which may be made up of bonds and/or bond funds, stocks and/or stock funds, real estate investment trusts or funds and fixed and/or variable annuities. Consider investments both in the United States and internationally for better diversification.

Depending on the size of your portfolio you may also want to include “alternative investments” such as commodities, oil and gas and others.

#6  At least annually evaluate your financial position and transfer enough to assure you have three years of income needs in a cash or cash equivalent position.



A general rule of thumb for how much you can expect your investment portfolio to provide is approx. 4% per year. This of course depends on your portfolio allocation and other factors. (example: $100,000 x 4% = $4,000 you can withdraw from this portfolio annually and reasonably expect your income to last the rest of your life.)


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