Solving The Income Challenge

For many people, one of the most daunting financial challenges in life is figuring out how to pivot into retirement. It’s quite a leap to move from earning a paycheck to being responsible for generating your own stream of income and regulating how to spend down your savings.

In a 2020 Schwab study, nearly three out of four people (72%) within five years of retirement are worried they’ll outlive their savings, and nearly six in 10 (57%) feel overwhelmed about determining how much they can spend in retirement.1

This uncertainty can be paralyzing. The average retiree still has 80% of their savings after 20 years of retirement, according to a Blackrock study.2 In one way, that shows impressive discipline. In another, it could show that fear is driving decision-making during a period when people should be enjoying what they’ve worked hard for.

With a retirement income plan, the challenge is how to get it right. Many financial professionals – including our network of advisors – offer a range of income-focused solutions to meet different client needs and preferences. Some deliver guaranteed income, such as annuities. Others, such as bonds and managed accounts, can be utilized within a plan to generate income streams.

It is important to recognize that this is not an either/or decision. In fact, sometimes a combination of these solutions is optimal, depending on your unique financial picture.

Income generating solutions

  • Annuities. Annuities can be a good starting point for your retirement income plan. They come in a variety of options – with the overarching objective of guaranteeing an income stream over a specified period or a lifetime. However, that comes at a cost of giving up control of your assets and turning everything over to an insurance company, which backs the products and their guarantees.
  • Bonds. A bond is an interest-bearing security that obligates the issuerto pay the bondholder a specified sum of money, usually at specific intervals (known as a coupon), and to repay the principal amount of the loan at maturity(assuming there are no defaults). Zero-coupon bonds pay both the imputed interest and the principal at maturity.
  • Exchange Traded Funds (ETFs). An ETF is a basket of securities that you can buy or sell through a brokerage firm on a stock exchange. ETFs are offered on virtually every conceivable asset class from traditional investments to alternative assets like commodities or currencies.
  • Preferred stocks. Preferred stock is distinct from common stock and is not offered by all companies. Preferred stocks offer dividends that aren’t guaranteed but must be paid before dividends are paid on common stock. As with bonds, preferred stocks have various terms and features that vary from one preferred to another and can impact the expected future income.
  • Real estate. Purchasing properties to earn rental income is another way to build passive income. Long-term rentals can provide a reliable source of cash if they are located in a healthy market for renters, but they also carry long-term stressors like maintaining those properties, as well as paying multiple mortgages, property tax bills and other costs.

The choice is yours

Solving the income challenge is complicated, but there is an array of solutions that can help. I encourage you to speak with a financial professional to help you determine what products are best for you.