If you’re about to retire, congratulations! You’re embarking on an exciting new phase of life. It also means it’s time to shift your focus from accumulating a nest egg to tapping it.
When you create a withdrawal strategy, you’ll need to consider your expected longevity, hoped-for retirement lifestyle and inflation. If you are eligible to receive Social Security benefits, check to see what your estimated amount will be.* Add your CalSTRS or CalPERS pension payout. Then subtract your monthly expenses. Any shortfall is the amount you’ll need to withdraw from your 403(b) and/or 457 savings.
Create an Income Stream
Now it’s time to explore your options. Your district's plan may offer a lump-sum distribution or a systematic payout plan. If you choose a lump sum, consider rolling the money directly into an individual retirement account (IRA). Rolling the money into an IRA extends tax-deferral and gives you the flexibility to manage your investments and create your own income stream.**
Here are some income options to consider:
Fixed annuities. A fixed annuity offers a guaranteed stream of income based on a specified interest rate. An annuity is managed for you and the investment risk falls on the issuer, so it may be a good solution if you don’t have the time, interest or expertise to direct investments or calculate withdrawals. The annuity guarantee is only as good as the financial strength and stability of the issuer, so investigate carefully.
It's important to note that you don't need to invest in a fixed annuity while you are accumulating your retirement savings. Fixed annuities generally provide low returns and have high fees. Instead, consider investing directly in mutual funds through your 403(b) or 457 plan. Once you retire, if guaranteed lifetime income is important to you, you can purchase an immediate fixed annuity with part or all of your 403(b) or 457 distribution.
Bonds. Bonds may provide regular income and the return of principal at the end of the term. For the risk-averse, U.S. Treasury bonds are backed by the full faith and credit of the federal government. Corporate bonds generally pay a higher yield than Treasuries, but have no guarantees. They are available in a range of maturities and risk ratings, with lower-rated bonds generally paying higher rates. It's important to note that investing in individual bonds versus investing in bond mutual funds is different.
Stocks. Dividend-paying stocks are another potential source of income, although dividends are not guaranteed. Regardless of dividends, it may be prudent to keep at least a portion of your retirement savings in stocks for their growth potential. Although past performance is not an indication of future results, historically, over the long term, stocks have outperformed other investments and outpaced inflation.*** A recent study suggests that investment returns during retirement may play a more important role in generating income than returns earned prior to retirement.†
Review, Rebalance, Readjust
It’s important to review your investments and withdrawal strategy at least once a year to see if you need to make adjustments based on your goals, risk tolerance and the performance of your investments. Consider meeting with a financial advisor. He or she can “run the numbers” and help you formulate a withdrawal strategy designed to meet your income goals throughout retirement.
* Calculators are available at www.socialsecurity.gov. Web site is provided for information only and is not affiliated with nor endorsed by this financial institution.
** Note that you must begin required minimum distributions by April 1 of the year after the year you turn 70½ or face tax penalties. Consult your tax advisor for more information.
*** Source: “Ibbotson® SBBI® Classic Yearbook 2008,” Morningstar Inc. As measured by large-company stocks from 1926-2007.
† Source: 401khelpcenter.com.