There are potentially several income sources available to you in support of your retirement living expenses. Following is a discussion that focuses on how to utilize your investments to this end.
DCA (Dollar Cost Averaging)
Before discussing systematic withdrawals, I think a discussion of DCA is needed. DCA is a strategy to manage price risk when investing in mutual funds, stocks or exchange traded funds. In a DCA situation you divide up the amount of your purchase to buy small quantities over time at regular intervals. If you’re contributing to a retirement plan at work, you’re probably using DCA by default. By utilizing this approach, you would buy fewer shares when prices are high and more when prices are low. As a result, DCA can lower the total average cost per share of the investment, giving you a lower overall cost for the shares purchased over time. However, note that it doesn’t always result in a net gain.
The concept of systematic withdrawals simply reverses the DCA process in that an investment account is set up to automatically take money out on a regular basis. This technique is often used by retirees to satisfy their income needs. Mutual funds and annuities are often the investments that are used. Enough shares are liquidated or sold as necessary to provide you the amount you wish to withdraw. The downside to this approach is that more shares must be liquidated to satisfy your withdrawal amount when your investments are down in value. The result is the reverse effect of the DCA strategy. In the event of a significant downturn in the investment value, or, if the downturn persists for an extended period of time, there is the danger of never recovering losses, or running out of money completely.
Some possible alternatives or variations to systematic withdrawals to help mitigate losses are:
- You could withdraw a percentage instead of a set amount. Of course, when your investment balance is down you would receive less. However, there is a better chance for recovery.
- Set aside a year’s worth of withdrawals in a money market fund and take withdrawals from this source instead. Then you could rebalance the account once yearly, selling the investments that had the highest rate of return and using the proceeds to replenish funds spent from the money market fund. Note there are variations of this approach that could be implemented.
- Utilize income producing investments such as bonds, mutual funds that invest in bonds, or stocks that yield dividend income.
- Purchase a guaranteed source of income. Examples would include income guaranteed by the US Govt. or an insurance company. Examples would include certificates of deposit, treasury securities, fixed annuities, or annuities with guaranteed income riders.
- Although not directly related to your investments, you could delay taking social security (up to age 70) so you receive more income.
These are some of the more common approaches to generate income from your investments. No single method is perfect. In many situations several different strategies are combined in an attempt to accomplish the income objective. Other factors to take into consideration are other income sources, the amount of income needed relative to the resources available, your risk tolerance, the need for liquidity now and in the future, income tax impact, as well as other financial objectives.
Don’t hesitate contacting us if you would like to learn more about these strategies.