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Creating an Income Stream

The income you get from your investment portfolio when you retire depends on how much you've invested over the years, the investments you've chosen, and the return you've realized on those investments.

Looking at Specifics

Here's a hypothetical example: meet Judy and Bill. Judy and Bill will have a combined income of $100,000 the year before they retire. They estimate that they'll need 80% of that in the first year to maintain their lifestyle. That equals an income of roughly $80,000 from various sources. The amount they need will increase in the years that follow to reflect increases in inflation.

Assume they'll receive $35,000 a year from Social Security and another $25,000 from an employer-sponsored retirement plan. That means they'll need $20,000 from their investments to help cover their regular expenses in the first year of retirement, before inflation begins to be a factor. Ideally, the earnings on the investments will be enough to meet that need. If not, their alternatives are continuing to work, cutting back expenses, or liquidating some of their investment principal.

Let's say their diversified investment portfolio is worth $600,000, and is allocated roughly 42% to stocks, 42% to bonds, and 16% to cash, here's a look at the income it might produce. (Remember, though, that this is a hypothetical illustration that is not intended to predict the return on specific investments or a particular allocation.)


Judy and Bill have $100,000 in long-term bank certificates of deposit (CDs) earning interest of 2% a year, or a total of $2,000 before taxes ($100,000 principal x .02 APY = $2,000 annual income.) If they need more income they might liquidate 5% of the balance each time they roll over a maturing CD. The first year, that would add an additional $5,000 to their income.


Their investment is insured against loss of principal by the FDIC. The interest they're earning on each of the CDs is guaranteed for the term of the CD.


If they liquidate principal, they'll be able to reinvest less. That will reduce their earnings because interest will be paid on a smaller principal ($95,000 earns less than $100,000). Similarly, if interest rates drop, they will earn less even if no principal has been liquidated. If they both liquidate and earn less interest, their income would take a hit.

They're probably smart in keeping less than 20% of their portfolio in cash, because it's possible that they could earn less than the rate of inflation. If that happens, their buying power is reduced over time.


Judy and Bill have $250,000 in stock funds in a Roth IRA. To be able to take $9,000 in income from the account, they withdraw any distributions (such as dividends) in cash and sell enough shares to equal what they need.


Equities have historically grown in value over the long-term and have been less vulnerable to the effects of inflation than other investments. Since withdrawals will be tax free, they won't lose anything to taxes. (Keep in mind that your results might be different.)


Past returns don't guarantee similar returns in the future. Many stock funds have performed well over time, but many funds have had bad years. If the value of the underlying stocks were to drop in a falling market, the income from the IRA could also drop. Judy and Bill might have to sell more shares to make up the difference, locking in a loss and reducing the value of the portfolio they are depending on for future income.

Ideally, they'll be able to keep withdrawals to roughly 3.5% of their account or less (for example) to help ensure their assets will last as long as they need them.


Judy and Bill have $250,000 in US Treasury bonds and notes, which have an average 4.5% interest rate. They receive an annual interest income of $11,250 before taxes from this investment.


Their investment is presumed safe because it's an obligation of the US government (though of course, there are no guarantees). Their expectation is that payments will be made on schedule. The principal can be reinvested as the bonds mature, or they can move some of it to a cash account and reinvest the rest.


Inflation is a potential problem. Because Judy and Bill are locked into the interest rates the bonds pay, inflation could erode their buying power if it rises much above the long-term average of 3% a year. In contrast, if rates drop as they roll over maturing bonds, their income will be reduced. Further, interest income is taxed at the same rate they pay on ordinary income. If their effective tax rate were 20%, they'd owe $2,250 in federal income tax.

Variety May Help

When you're planning for retirement income, allocating your assets across several asset classes is important - diversifying may help you overcome some of the pitfalls that come with each type of investment. Of course, it doesn't guarantee you'll have as much income as you'll need.

For example, Judy and Bill might have invested their retirement assets in other ways, including individual stocks or ETFs, bond funds, equity options, and real estate. Making money with equity options tends to require more hands-on involvement than the other investments they've made. The issue with real estate is that it could be hard to liquidate easily if the real estate market was depressed. And, as with other equities, the sale price is not guaranteed.