Upticks: 4 Retirement Income Strategies
By Luke Sullivan on April 17, 2025
In our experience, it takes some retirees over a year to get comfortable spending their retirement savings. These four retirement income strategies can help change your thinking around spending money in retirement. By aligning your spending with specific goals, you can feel better about using your hard-earned savings. Understanding how your savings continue to work for you in retirement is important. Jake and Cory provide some guidance on ways to manage your retirement income and make more informed decisions.
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Read an overview of the conversation below:
The Psychology of Retirement Spending
Retirement marks a significant transition on one’s path to wealth, shifting from saving to spending. This change can be psychologically challenging for many retirees who have spent years accumulating their nest egg. Jake and Cory emphasize the importance of defining specific goals to help ease this transition. By clearly identifying what retirees aim to achieve with their savings, they can better manage the shift from saving to spending. This approach helps retirees understand the purpose behind their savings and can reduce anxiety associated with withdrawing funds. Jake notes that in his experience, it often takes retirees at least a year to become comfortable with spending from their retirement savings. He recommends assisting clients in comprehending the income produced by their portfolio to help ease the perception of dollars only flowing out.
To address these challenges, Jake and Cory discuss four distinct retirement income strategies to help retirees manage their finances more effectively. These strategies include total return, time segmentation, income protection, and risk wrap. Each approach offers benefits and drawbacks; understanding these can help retirees make more informed decisions about their retirement spending.
Strategy 1: Total Return
The total return strategy involves maintaining a diversified portfolio of stocks and bonds and systematically withdrawing a fixed amount, such as $5,000 or $10,000 per month. This strategy typically has a heavier allocation to stocks, with some money in cash or bonds. However, Jake and Cory highlight the risks associated with this approach, particularly the sequence of return risk. If the portfolio experiences volatility, retirees may be forced to sell assets when they are down in value, potentially jeopardizing their financial stability. Advisors often use Monte Carlo analysis to assess the likelihood of a plan failing under different market conditions. Jake and Cory caution against blindly following this strategy, emphasizing the importance of having a target rate of return and maintaining a buffer of cash to weather market downturns.
Strategy 2: Time Segmentation
Also known as bucketing, the time segmentation strategy involves dividing investments into different buckets based on their time horizon. Short-term buckets are allocated to safer assets like cash or one-month treasury bonds, while longer-term buckets are invested in growth assets like stocks. This approach allows retirees to pull from assets that are not down in value during bear markets, reducing the need to sell stocks at a loss. Jake and Cory discuss the benefits of this strategy, noting that it helps clients avoid panic during market downturns. However, they also highlight the drawbacks, such as the risk of depleting the short-term bucket and being forced to sell growth assets during a bad market. They advocate for a combination of the total return and time segmentation strategies to potentially provide a more balanced approach to retirement income.
Strategy 3: Income Protection
The income protection strategy focuses on safety first, using fixed annuities to generate an income for core spending needs. This approach is commitment-oriented, as retirees can lock in a fixed income for the rest of their lives. Jake and Cory express their reservations about annuities, citing their irreversible nature, potential tax complications, and high fees. They argue that annuities do not typically protect against high inflation and can reduce pressure from having money in stocks. While some academics advocate for annuities, Jake and Cory prefer other investment options that offer more flexibility and control. They suggest that retirees already have an annuity in the form of Social Security and may consider other investment strategies to help complement their retirement income.
Strategy 4: Risk Wrap
The risk wrap strategy combines market reliance with commitment orientation, using variable annuities to provide potential upside while protecting against downside risk. Variable annuities include investment options within the annuity, allowing retirees to invest aggressively and potentially benefit from market gains. However, Jake and Cory caution against this approach due to the complexity and high fees associated with variable annuities. They note that in their experience, investors may not fully understand the fees and risks involved, and the loss of control and flexibility can be detrimental. Jake and Cory emphasize the importance of working with a fiduciary wealth advisor who acts in the client’s best interest and provides transparent investment management. They advocate for direct investment in stocks and bonds, which offers more control and transparency for retirees.
Final Thoughts
In summary, Jake and Cory provide valuable insights into managing retirement income through various strategies. They highlight the importance of understanding the psychological shift from saving to spending and the need to define specific goals. While the total return and time segmentation strategies offer a balanced approach, the income protection and risk wrap strategies involve higher fees and less flexibility. Jake and Cory advocate for a combination of strategies tailored to individual needs, emphasizing the importance of working with a fiduciary advisor to help ensure transparent and effective investment management. Their overall message is clear: retirees should be informed and cautious, making decisions that align with their financial plan and comfort levels.
Thank you for tuning in, we hope you have a great week!
