The financial markets don't owe your retirement anything. They were designed to finance business capital, not fund your retirement. An investment-based retirement income strategy has many pitfalls, from running out of money and fluctuating income to severe spending cutbacks and reduced quality of life. That's because poor market returns, especially during the pivotal early years of retirement, can decimate savings and imperil future spending no matter how well markets perform later. I have written extensively on this subject in Spending From Your Portfolio in Retirement Can be Dangerous and One Mistake That Can Ruin Retirement. If you've staked your retirement to the markets but realize you don't have the stomach for it, now may be the time to revisit your retirement income strategy.
Preferences Preferences Preferences
Fortunately, more reliable and secure strategies for sourcing retirement income exist that don't rely on an investment-based income strategy. These strategies come with much less risk and worry than one based on market performance. Before choosing an income strategy, you'll need to know your income preference. Your preference does two things: indicate how much risk you will tolerate in generating retirement income and inform the most suitable income strategy.
That said, no strategy is perfect. Everything is a tradeoff, so you need to be comfortable with the tradeoffs you are making. Many strategies exist, but they all fall into two broad categories: Probability-Based and Safety-First. The former emphasize market growth to fund retirement spending goals with increased risk. The latter value contractually guaranteed income sources (annuities, bonds, and pensions) to meet retirement spending goals with much less risk.
Strategies Strategies Strategies
Determining your income preference and strategy is easier said than done. It requires careful thought, poignant questions, and familiarity with the various strategies. To make it easier, we've provided a decision matrix below to help you determine your income preference and strategy by answering a few questions.
Sourcing reliable retirement income can be challenging for all but the most well-funded retirements. But that doesn't mean it's hopeless. The right income strategy can make all the difference and mitigate market risk on retirement spending. That said, there are no perfect strategies. All require tradeoffs. The best strategy resonates with your preferences on how you source income to pay for retirement. You'll need to assess your income preference to inform the most appropriate income strategy. From there, if you're unfamiliar with the strategy, you'll want to partner with a knowledgeable financial professional to ensure it meets your retirement income goals. A retirement, free from fear, uncertainty, and worry and full of fulfillment, hope, and promise, starts with an income strategy in synch with your income preference.