By Chris Heisten, CRPC®, CFP®, CSRIC®

Take a second to think back to all the years you’ve spent working hard to save for your future and eventual retirement. There were probably long hours and more cups of coffee than you can count! But with retirement quickly approaching, it’s time to start looking forward to how all the money you saved and invested over the years can turn into your income. 

Here are the top 5 tips we recommend for generating income from your portfolio for your retirement. 

Determine How Much You Can Safely Spend

Before making any decisions about how to withdraw from your portfolio, it’s crucial to first understand how much you can safely spend. The last thing you want is to spend too much based on a general rule of thumb and risk running out of money later in retirement. There are a number of factors to consider when determining how much you can safely spend, including long-term goals, lifestyle expenses, expected life span, and healthcare needs. Working with a qualified financial professional is a great way to determine the right amount for your needs.

Understand the Different Withdrawal Strategies

Once you have determined how much you can safely spend, it’s time to look at the different withdrawal strategies available. In general, there are two main methods for turning your savings into income:

Systematic Withdrawal Approach

With the systematic withdrawal approach, you withdraw a fixed percentage of your retirement savings each year, typically between 3% and 5%. The general rule of thumb is 4% in the first year of retirement and increase the amount each year to account for inflation. The withdrawal rate is based on the value of the portfolio at the start of each year, so the amount of income can fluctuate depending on market performance. 

This strategy allows you to generate a steady stream of income while still allowing for flexibility and potential growth of your investments. However, it’s important to monitor the withdrawal rate to ensure the portfolio can last throughout retirement. 

Bucket Approach

Another way to optimize your portfolio longevity is to divide your savings into different buckets to match different time horizons. Each bucket will have investments tailored to that time horizon in terms of asset class, risk level, and liquidity.

One common approach is to divide your portfolio into three buckets: 

• A short-term bucket will be invested conservatively in cash, bonds, and other low-risk assets. This bucket is for your expenses over the next 1-3 years.
• A medium-term bucket will be slightly more aggressive, investing in a mix of stocks and bonds to generate growth and income over the next 3-10 years.
• A long-term bucket will take on much more volatility by investing primarily in stocks or other growth-oriented assets for expenses that are 10-plus years away.  

By dividing your portfolio into buckets, you can potentially generate income from your medium-term and long-term buckets while ensuring you have the funds you need for near-term expenses. Keeping the long-term bucket invested in growth assets also increases your odds of keeping pace with inflation over time. 

Maintain Tax Efficiency

You may not think much of it, but the order in which you withdraw from your investment accounts can significantly impact the longevity of your portfolio. In general, it’s best to spend your taxable accounts first, followed by your tax-deferred (or pre-tax) accounts, and finally your tax-free (Roth) accounts last.

Spending your taxable accounts first can help minimize your tax liability in retirement. This is because withdrawals will be taxed as capital gains rather than ordinary income as long as the underlying investments were held for longer than a year. This strategy also allows your investments to grow tax-deferred longer. 

Once you have exhausted your taxable accounts, you can begin withdrawing from your tax-deferred accounts. Since these accounts are subject to ordinary income taxes, it’s important to plan your withdrawals carefully to minimize the tax hit.

Finally, once you have exhausted your taxable and tax-deferred accounts, you can begin withdrawing from your tax-free accounts like Roth IRAs and Roth 401(k)s. Withdrawals from Roth accounts are not subject to income taxes, making them a valuable source of tax-free income for future use.

Take Advantage of Compound Interest

Compound interest is the interest you gain on the initial principal invested as well as the accumulated interest gained over time. Accounts that utilize compounding interest as opposed to simple interest include CDs, high-yield savings accounts, money market accounts, bonds, and bond funds. Compound interest is best taken advantage of when investing for long-term growth in your portfolio. The longer you’re invested in an account giving you compound interest, the more your account will grow. The best way right now to generate income from compound interest is to invest in high-return investments and reinvest the profits. 

The benefits of compounding interest come over a long time period. So investing your income as soon as you can, and with as much of your income as you can, is the ideal way to take advantage of compound interest. The Rule of 72 applies to compound interest and is used to estimate how quickly your investment will double in value based on its rate of return. Playing around with this simplified calculation rule can show you how having time on your side when investing is key to passive income growth.

Don’t Forget About Long-Term Growth

Many people are quick to assume that retirement means your portfolio must become ultra-conservative, consisting only of cash and bonds as a way to safeguard against market volatility. While your portfolio should become slightly more conservative, you still need assets geared toward long-term growth.  

As tempting as it is to invest solely for income, avoid investing your entire portfolio in income-producing assets like bonds or dividend-paying stocks. The interest payments received can fluctuate wildly from year to year and your payments are unlikely to keep up with inflation. Dividend investing also has some major disadvantages, including higher fees and taxes, as well as questionable historical performance.

Those looking to maximize their retirement savings should invest in a diversified portfolio that includes both income and growth-style investments. Of course, the specific allocation that’s right for you depends on your individual financial goals, risk tolerance, and other factors. This is something we at Heisten Financial can help you determine.

Do You Have Questions About Your Retirement Income Strategy?

Retirement is going to come before you know it, so take the time now to understand how to utilize your portfolio as your income. Let’s be honest, though, sometimes it can be a little difficult to know what exactly to do for your unique situation. 

At Heisten Financial, our job is to help you simplify your investments and tailor a plan that works for you. We believe partnering with a financial advisor is the best way to assess your income needs and align them with your goals. And as a fiduciary, you can trust that we will always put your best interests first. To get started to establish a customized financial strategy, we invite you to email jami@heistenfinancial.com or call 907.222.6270. 

About Chris

Chris Heisten is President and Founder of Heisten Financial LLC, a fee-based boutique financial planning firm with the focus of giving clients back their time so they can spend it doing what’s most important to them. Acting as a true fiduciary for his clients, Chris aims to solve their financial pain points and move them toward financial freedom. In the financial industry since 2007, Chris partners with business owners and oil workers on their journey through life, striving to instill calmness and a sense of direction as he simplifies the complex. He loves nothing more than seeing clients experience relief when they achieve what they thought was impossible.

Chris graduated from the University of Maine, where he played hockey on a scholarship, and retired from professional hockey in 2007. In the community, he remains engaged serving as a youth hockey coach. Chris holds the CERTIFIED FINANCIAL PLANNER™, Chartered Retirement Planning Counselor℠, and Chartered SRI Counselor™ designations. Outside of the office, he enjoys trying new food and wine, reading, traveling, playing golf and hockey, fat tire biking, and donating to local charities. His passions include being a husband and dad, lake life with the family, watching his son and daughter play sports, and spending time with his wife. To learn more about Chris, connect with him on LinkedIn.