Morningstar Solutions
Morningstar Solutions
Retirement Strategies to Meet Your Income Goals
Slide 2: Retirement Strategies to Meet Your Income Goals
Once you are close to reaching retirement age you need to make sure that your portfolio will continue to work for you to meet the needs of your income goals and to ensure that your money will last. Read Christine Benz's article on how to prepare your portfolio for retirement.
Slide 3: Retirement Strategies to Meet Your Income Goals
The first step is to balance your portfolio to meet your income goals. In planning for this goal, some trade-offs might be necessary depending on your situation. Typically one would want to reach a good balance between liquidity, principal preservation, and assurances that the needed income to meet expenses will be there for you when you need it. Ensuring that your portfolio is on track is essential.
Slide 4: Retirement Strategies to Meet Your Income Goals
There are many strategies to consider. A strict income-focused strategy (in which investors live off Social Security, pension income, and the income of their investments without tapping investment principal) is probably one of the safest, and often relies on income from high-quality bonds and bond funds (including Treasuries), CDs, and other cashlike investment vehicles. However, because these are safer investments, their interest rates tend to be lower, and one would need very large principal amounts to produce a healthy income stream. Additionally, the current market is in a cycle of very low interest rates, making it tougher to earn a workable yield on these investments.
Slide 5: Retirement Strategies to Meet Your Income Goals
Another strategy is to complement your Social Security, pension, or 401(k) plan distributions with an annuity, which is an income-producing investment offered by insurance companies. Investors will make a lump sum payment to the insurance company in exchange for an income stream, which may be immediate, deferred, fixed, or variable (depending on the annuity type), and they have a variety of options including certain guarantees and death benefits, which may affect the level of income. In addition to the several bells and whistles that come with some annuities, investors must also carefully consider the timing of their annuity investments, which can affect their payouts. In short, investors must be on their toes in evaluating these products, which may charge hefty surrender fees should you need your principal back. However, the certain income stream provided by a simple annuity can be an attractive tool for portfolio planning, and deserves careful consideration.
Click here to view the accompanying video.
Slide 6: Retirement Strategies to Meet Your Income Goals
More risk-tolerant investors may look to juice their retirement income on the margin by considering a slug of high-quality dividend stocks, an allocation to a more opportunistic bond bond, or possibly even a well-managed municipal fund (given their tax advantages, the yields on many muni funds can look attractive on an aftertax basis). Of course, these investments are not risk-free and aren't meant to replace the core income-producing investments of your portfolio, whose stability serves an important role, even if their yields are low right now. Morningstar's Christine Benz offers tips for using them judiciuously in the accompanying video.
Click here to view the accompanying video.
Slide 7: Retirement Strategies to Meet Your Income Goals

Even with income-producing investment at their disposal, choosing to spend only the income from investments without touching principal may not be a realistic possibility for most retirees, except for those who have an awful lot of wealth. So the only alternative is to take a total return approach, which means periodically invading principal to meet living expenses. This may actually be a safer approach than over-allocating an income portfolio to higher-yielding (and riskier) investments in the quest for yield.

Click here to view the accompanying video.
Slide 8: Retirement Strategies to Meet Your Income Goals
Related to the total-return approach is a concept known as bucketing, which may provide investors a mental framework to effectively use their portfolios for income and capital appreciation. As described in the related video below, this approach basically involves keeping a portion of money in a near-term "bucket" of safe, liquid investments, which is always available to be tapped for day-to-day living expenses. Then, a longer-term bucket of the portfolio can be in higher-risk/higher-reward investments, which won't be heavily tapped for living expenses. Instead, the longer-term investments are mainly left alone to (hopefully) appreciate more robustly over time and are only tapped periodically to replenish the shorter-term, liquid bucket as it is drawn down.
Click here to view the accompanying video.
Slide 9: Retirement Strategies to Meet Your Income Goals

But even with their best efforts, today's retirees may find it difficult to generate a sufficient current income stream that is also sustainable without taking on an excessively risky portfolio profile. In such cases, working longer is likely going to be part of the solution.

It's not an appealing prospect, but T. Rowe Price's Christine Fahlund recently presented some research that may take the edge off. T. Rowe found that additional retirement plan contributions once you're close to traditional retirement age do not add a lot to your overall portfolio. So one compromise for those in this predicament is to keep working, but stop making additional retirement plan contributions and instead spend that extra money on things like vacations with the kids and grandkids. By keeping the job awhile longer, these folks can also defer taking Social Security and investment drawdowns.

Click here to view the accompanying video.
Accompanying Video
Retirement Strategies to Meet Your Income Goals
This slide does not have an accompanying video.