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You’ve saved and invested all of your adult life with a goal of not working anymore — or at least not having to work. Despite the market’s ups and downs, you’ve put together a sizeable nest egg, from which you hope to draw enough income to support the retirement lifestyle you’ve chosen.

Now the challenge you face is transitioning from a life of asset accumulation into a lifetime of income distribution, while preserving as much of those assets as possible.

You are going to be hearing more and more on this subject over the next several years, and most of the ideas, strategies and financial products you’ll see will fall into one of these three categories:

ANNUITIZATION
If you qualify for a defined-benefit pension plan from your employer, and you chose to receive regular income payments for the rest of your life in lieu of a lump sum, you are familiar with this concept.

You also can apply it to other retirement savings by purchasing a fixed or variable annuity from an insurance company and directing that it be immediately "annuitized."

By doing so, you are exchanging a chunk of your retirement assets for a promise of lifetime income from the insurance company. (Note that any guarantees offered by the insurance company are based on the claims-paying ability of the insurer and do not apply to the various sub-accounts of a variable annuity, which will fluctuate daily.)

The benefits of annuitization are an income you cannot outlive and potentially fewer, if any, investment decisions on that portion of your savings. Newer annuity products even allow the income payments to be periodically adjusted upward for inflation, overcoming what once was a major shortcoming.

The negatives: costs and loss of flexibility. The decision to annuitize is typically irreversible. Cost-of-living adjustment riders and other guarantees come at a significant cost. In addition, for fixed-rate annuities, relatively low current interest rates mean the level of income earned can be disappointingly low.

SYSTEMATIC WITHDRAWAL

Under this approach, you continue investing your nest egg for total return in retirement while simply withdrawing a portion of it on a regular basis to live on.

In theory at least, as long as your investments keep growing over time at a rate that is higher than you are withdrawing them, your money lasts indefinitely. You maintain control over how your assets are invested, and you retain the flexibility to adjust your income withdrawals based on your future needs.

The negatives: market risk and self-discipline are required.

Unlike annuitization, there are no guarantees with this approach (instant payday loan). Systematic withdrawal requires enormous self-discipline in establishing reasonable limits on the annual percentage of your portfolio you’ll be withdrawing each year. Several mutual fund companies have addressed this concern by creating a whole new class of investment vehicles known as "income-replacement" funds.

These funds attempt — but do not guarantee — to provide shareholders with a predictable stream of income over a pre-established period of time adjusted for inflation.

There is also no guarantee that the money invested will last for the entire period, and due to recent market conditions, several of these new funds already have begun to fall well behind their projected returns.

INCOME-ONLY

Here’s an idea that’s been around longer than all the rest, yet you rarely hear it these days.

Take that nest egg, invest it in a well-balanced and diversified portfolio of stocks and bonds, and live off the dividends and interest you receive.

Assuming the income is sufficient for your needs, that it increases over time with inflation and that it is reasonably consistent and predictable, you no longer need to worry as much about the day-to-day price changes in your portfolio. Just focus on the income.

The negatives: lower yields and no guarantees. As with systematic withdrawal, this approach requires the discipline to stay the course when market conditions turn against you.

In order to invest for rising income, your portfolio likely would need a relatively large allocation to blue-chip stocks that have a track record of increasing their dividends, and there’s no way to be certain those increases will continue. And because the dividend yield on stocks is traditionally lower than the interest yield on bonds, you likely would need a much larger nest egg to generate the same level of income as the other two strategies, at least in the early years.

There’s nothing wrong with using more than one of these strategies to generate retirement income from your investment portfolio. In fact, the combination of guarantees, flexibility and the potential for income increases is appealing. Just make certain to base your plan on conservative assumptions, a long life expectancy and the likelihood that your cost of living will continue to increase.

MIKE BROWN IS FIRST VICE PRESIDENT FOR INVESTMENTS AND A CHARTERED RETIREMENT PLANNING COUNSELOR AT UBS FINANCIAL SERVICES INC.

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Filed under: economics by Fred