Should You Manage a Portfolio or Take a “Pensionized” Income?

As with most things in personal finance, the most suitable strategy will depend on your financial goals, your individual needs, and the general makeup of your financial picture.

Here’s how we suggest approaching the question.

First: Your income needs

Your retirement income budget is, obviously, subject to flexibility and change. However, it’s useful to get a ballpark figure of how much your lifestyle might cost.

It can help to consider a couple of retirement lifestyle categories:

• What if we stay in our current home and adjust our lifestyle for retirement? What expenses might rise or fall as a result? (for example, some couples realize they will no longer need two cars)
• What if we moved, sold our home, or changed our lifestyle more drastically? What would our plan be, and how might that impact our savings and expenses?

These are obviously extremely open-ended: depending on your current lifestyle, your hopes and goals for retirement, and your personal needs, a drastic change of lifestyle could involve anything from buying a timeshare to moving abroad – and everything in between.

We recommend making this part of things an ongoing conversation or area to reflect on.

You might even consider doing some experiments prior to retirement to see what makes sense. For example, you could rent an apartment for a month or live in a different city.

Once you get closer to identifying what you want to do, it’s easier to start working towards an understanding of what you can do – and how.

Your income sources

In developing a retirement income strategy, it’s important to identify where your income is coming from, how much you can count on, and how much of it will be variable.

Many retirees draw a combination of:

• Social Security
• Personal savings
• Workplace retirement plan income or savings
• Annuities
• The proceeds from asset or other sales
• Ongoing income from other sources (such as a part-time job, the rental of a second home, etc.)

Managing your personal risks

Depending on your mix of income sources, you’ll want to develop a map of what you can expect and when. Of course, a key component of this is risk.

Depending on your income sources, you may be exposed to varying types of risks, including:

• Financial market risk
• Local market risks, including the housing market
• Interest rate risks and other economic factors
• Pension plan stability
• Health and vitality, especially for those looking to maintain a business or part-time job

Obviously, it’s not possible to completely insulate yourself from every risk, but having an understanding of your key risk factors and how they could impact your income can help you build a plan that accountsfor the risks you face.

A decision

One of the key questions our clients ask about is retirement income: how can I get the most income in the most secure way possible for as long as possible?

The answer depends on your personal financial situation and the characteristics of your retirement plan. In some cases, “pensionizing” your retirement savings into a consistent income stream works best – in other cases, it might make more sense to pensionize only a portion of your savings, or even none at all.

The right choice for you will need to account for your goals, your savings, your income needs, and your risk preferences.