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Chris Ruedi: Build your retirement income from multiple sources

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Early in the retirement planning discussion, I often share my opinion on the challenges someone may encounter as they transition from working to retirement.

The conversations typically begin with the way in which someone views the path toward successful retirement. Too often, the focus is on how much money someone has or needs to have saved to last them for the rest of their life.

Rather than viewing retirement through the savings mentality, I encourage people to think of retirement through the income perspective. It’s wonderful to have accumulated and saved assets during working years. However, if the purchasing power of those assets is eroded over time by inflation and increased costs of living, even a substantial starting balance of retirement assets may not be enough.

This concept of “protecting” what has already been accumulated often leads someone to become too conservative too early. Think of your accumulated assets as a base from which to draw income over time and understand there will likely be a need for additional growth of that asset base during retirement years.

Once someone gets on board with an income approach, the next hurdle is determining how much to take from each source of funds. A good solution is to start with someone’s “guaranteed” sources of income and move to the variable sources of income. Some may choose to label these sources as nonmarket-dependent sources vs. market dependent sources.

Nonmarket-dependent items include items such as Social Security, pensions, required minimum distributions, annuitized investments, rental income or farm income. These sources serve as a base on which to build ongoing income in retirement and are not subject to the same volatility that impacts traditional investment portfolios. This is not to say these sources are without any risks, but they are more predictable over shorter time periods.

Market-dependent sources include retirement accounts such as 401(k)s, IRAs and Roth IRAs. Other examples include variable annuities and traditional brokerage investment accounts.

Based on the investment mix, a retiree and their adviser can identify a sustainable target amount that can be withdrawn annually for income without jeopardizing the long-term focus of the portfolio. The goal is to draw income as needed without substantially depleting principal amounts during the early retirement years.

Other considerations for tax purposes may influence the timing and amounts to take from various sources that are tax-deferred, tax-free or taxable subject to capital gains rates.

Putting everything together, a retiree can have confidence that the income needed to maintain their desired lifestyle will be available for the duration of their lives.

As circumstances change, it may be necessary to review the income composition and adjust accordingly. Looking at retirement through the lens of income rather than savings can help someone avoid the pitfalls of becoming too conservative too quickly.

As always, please be sure to consult your financial professional regarding your unique situation.

Chris Ruedi is a financial adviser with Savant Wealth Management, Bloomington.