Friday, June 14, 2024

How To Generate Income From 401k

Don't Miss

Here’s A Look At Some Of The More Popular Investment Options:

How Mutual Funds Generate Retirement Income!

Stocks for growth

The majority of savers still buy stocks either directly or through a mutual fund or exchange-traded fund which are shares in a publicly listed company. Stock prices tend to rise over the long-term, which is why people buy them. Since 1926, the S& P 500 has posted a 10.24% average annual return with dividends reinvested, according to S& P Dow Jones Indices. In other words, if you invest in equities in your 30s and retire in your 70s, there’s a high likelihood that your money will have grown over those 40 years.

The downside is that stocks can fall. In the Great Recession of 2008 and the more recent pandemic stock market plunge, stock prices dropped by more than 35%, which caused a lot of problems for those in and nearing retirement.

Bonds for safety

Bonds are another popular investment for savers as they can move a lot less in price than stocks. Investors lend money to a government or company in exchange for an annual payment based on a predetermined interest rate. At the end of that bond’s term usually between one and 30 years you get back your original investment. Investors like bonds for two reasons: they get some guaranteed annual income and there’s less risk, depending on the kind of bond you buy, of losing any money. Because of this, bonds tend to fluctuate less than stocks and so they balance out a portfolio’s overall ups and downs.

Alternative asset classes

How Much Should I Contribute To My 401

As long as you can afford to do so, it’s often advised that you contribute to your 401 to at least maximize your employer’s contribution. Often, the employer’s contribution maxes out at a defined percentage set by your company. If your company has a generous match, you may be limited by IRS contribution limits.

In addition to making sure you at least get your company’s match, consider contributing more if you have enough cash flow. Whatever you set aside will receive favorable tax treatment and has the potential to appreciate in value.

Retirement Savings With Diversification

Better yet, we’ll show you solutions that use funds, so you’d get built-in diversification. Leading financial advisors cite the funds for consideration.

The advisors all emphasize that the right mix of funds depends on what you consider reasonable risk in your unique circumstances given your risk tolerance, time frame and goals. As for the $1 million retirement savings balance, that too may be easier to achieve than you thought.

Customers Fidelity Investments owned 818,100 IRAs and 401 accounts with balances of $1 million or more as of the end of 2021.

Recommended Reading: Can I Transfer Rollover Ira To 401k

Creating A Steady Income For Older Adults

Social Security, pensions, and investments are common sources of income for older adults, but many additional possible income streams exist. From annuities and bond ladders to reverse mortgages, the options below may not fit every person but are an excellent place to start exploring what may be possible.

Get an understanding of multiple strategies for receiving a steady income, along with the pros and cons and why theyre important.

How We Make Money

Should I Make Roth Contributions Inside My 401(k) Plan? â Fee

The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.

Recommended Reading: What Age Can You Take Out 401k

Five Types Of Investing Strategies

These pie charts show the five types of investing strategies as well as hypothetical asset allocations. Pie slices without a percentage represent 5%.

Here are some common sources of retirement income. Depending on your goals and circumstances, some of them may yield significant monthly returns, while others may just provide beer or lunch money.

Prioritize Your Basic Needs

Next, it’s time to allocate your Social Security benefits. Leonard Hayduchok, CEO and president of Dedicated Financial Services, suggests treating your Social Security check as you would a paycheck. Use the benefits to pay for regularly occurring expenses such as housing costs and groceries. According to the BLS survey, people 65 and older spend an average of the following amounts on food and related housing expenses a year:

  • Housing: $17,472

  • Utilities: $3,810

  • Food: $6,599

You should try to allocate about 60% to 70% of your annual Social Security benefits to pay for these expenses, though that won’t be possible for many retirees. If your annual benefits equal the national average of $1,619.67 a month or $19,436.04 a year, that means 60% of your Social Security check — which comes out to $11,633.83 annually — won’t be enough to cover the expenses above.

Still, it’s a good idea to dedicate as much as you can to food and housing. After all, these are your basic needs — without them, you won’t live well. Just keep in mind that once you’ve used your check to cover these basic expenses, you’ll likely need to dip into your additional income sources to cover other costs.

Retirees whose food and housing costs are greater than their Social Security checks should look for ways to cut back on these expenses. For example, one option might be to move to a city where you can live comfortably off Social Security.

Also Check: Should I Convert My 401k To A Roth Ira

The Danger Of Reaching For Yield

Wait, you say, its not necessary to settle for a paltry 2.5% or 3% income. You can select high-dividend stocks that yield 4% or more, or use high-yield bonds and REITs with payouts of 5% to 7%. But reaching for yield is problematic for at least three reasons.

You may be taking too much risk

No one is suggesting its impossible to build a well-diversified portfolio of dividend stocks. But its difficult, especially if you focus on Canadian companies. Some economic sectors are barely present in Canada, and concentrating your portfolio in a few banks and energy stocks is riskier than many investors believe, even though it has worked well in recent years. The Canadian REIT sector is also tiny and dominated by just a few large names. Using low-cost index funds with hundreds or thousands of stocks offers far more diversification.

On the fixed-income side of the portfolio, high-yield bonds have big payouts for a reason: theyre much riskier than investment-grade bonds. They plunged along with stocks in 2008, for example, so they offered almost no safety net when you needed it most. High-quality government and corporate bonds have modest yields but they provide more ballast when stock markets are choppy.

You may pay too much tax

REITs and high-yield bonds, meanwhile, throw off a lot of fully taxable income while offering little potential for growth, which makes them among the least tax-efficient of asset classes.

You may be mistaking yield for return

How Much Retirement Income Does $500000 Generate

Using Vanguard Funds To Generate Retirement Income – Part 1

For example, $500,000 will generate between $2,083 and $9,525 per month over a single persons lifetime or between $1,875 and $5,575 per month for both spouses lifetimes if an annuity is utilized to distribute the retirement income. Income amounts are factored by age and the length of time before starting the retirement income distribution.

Read Also: What Is An Ira Account Vs 401k

Holistic Retirement Asset Allocation Plan

When you look at all the options available, most of the time the best option is a plan that uses many of the choices discussed. The goal of a holistic retirement asset allocation plan is not to maximize returnit is to maximize lifetime income. That is a different goal than the traditional asset allocation investing mantra of maximizing return per unit of risk.

Pros: A combination of several retirement income ideas named in this list is often what is needed to create the ideal income flow for your needs.

Cons: Takes a lot of work to put it together right, but the hours of planning can be worth the effort for months and years to come!

If you’re near retirement, the most important thing you should know is that retirement investing needs to be done differently. You need income for lifenot a hot stock tip.

Create A Monthly Budget For Your Social Security Check

The first thing retirees should do with their Social Security check is confirm they received the correct amount, said Kimberly Foss, certified financial planner and founder of Empyrion Wealth Management. After you confirm that your payment is accurate, it’s time to budget it properly.

Bill Kearney, owner of Integrated Financial Concepts, recommends creating a spending plan before spending your Social Security checks. Here’s how:

  • Assess your expected monthly costs, including rent or mortgage payments, food, healthcare, debt and other living expenses.

  • Tally expected income and where the income will come from.

  • Match up your expenses with your expected income sources. In other words, figure out what your Social Security payments cover vs. your pension or withdrawals from retirement accounts.

  • Also Check: What Are The Different 401k Plans

    Plan Your Withdrawals From Taxable And Tax

    An important thing to remember in planning for your retirement income is that some of your accounts may be taxable. Withdrawals from traditional IRAs and 401 plans, for example, are generally fully taxable as ordinary income. This not only reduces the amount of income you can draw from those types of accounts, it also may be enough to push you into a higher tax bracket. This is why the taxability of your retirement accounts, both on the contribution and on the distribution end, can be so important.

    With a Roth account, for example, qualifying retirement distributions are completely tax-free. Even better, you dont have to take any mandatory withdrawals at age 72 from a Roth, as you would with a 401 or traditional IRA. Balancing your distributions across these accounts can help you manage both your tax burden and your overall net income.

    Five Ways To Generate A Steady Retirement Income

    How to Use Your 401k to Generate Income for Retirement

    Retirement is the time to relax after a lifetime of working. When you retire, you will need to generate a steady income to maintain your lifestyle without depending on others. You might have done everything right to save for retirement you started early, maximized your 401 plan, and avoided cashing out your retirement plan.

    But, how do you envision a steady income without having to go to work during your retirement years? This might seem challenging at first. But its still possible if you develop a robust strategy based on your current financial status.

    To make sure you dont outlive your savings, here are five retirement income strategies you can use to create the cash flow youll need.

  • The Bottom Line
  • Read Also: Is An Ira Better Than A 401k

    Sell Overweighted And Lower

    If you need to withdraw more than your RMD, look to your taxable accounts next. Withdrawals from taxable accounts are taxed as capital gains rather than as ordinary income, with a preferential rate for gains on investments youve owned for more than a year. Of course, if youve lost confidence in any of your other investments, they are also good sell candidates.

    Smart Move: Try to postpone selling appreciated investments that youve owned for less than a year. You need to have owned the security for one year and one day to get the long-term capital gains tax rate.

    If you have to sell high-rated securities, you can minimize your tax bill by starting with those that will generate a loss, before you sell those that will generate a gain. Also, whenever youre considering selling an investment in a taxable account, think about matching gains to losses as a way to control your taxes. See Question 25, pages 220221, for more about this process, known as tax-loss harvesting.

    Can You Lose Money In A 401

    Yes. Because your 401 will be invested in various assets , your portfolio will be exposed to market risk. If the stock market crashes, the stocks component of your portfolio will also go down in value. This is why it is responsible to begin shifting into less-risky assets like bonds as retirement approaches. Note, however, that even bonds can lose money, such as in a rising interest rate environment.

    Recommended Reading: What Percentage Should I Be Putting In My 401k

    Things To Keep In Mind When Getting Started

    This is your current budget, which takes into account all of your present-day income and expenses. While you should have some idea as to what you’ll need to save per month based on your retirement goals, you also need to make sure that you have that money to save. It’s a good idea to put retirement savings as a line item in your budget, just like food and shelter costs, so that you can set aside those funds every month.

    This is a tool you can set up between your checking account and your retirement account so you don’t forget to save. Set it up so that on the same day every month maybe it’s the day you get paid funds you’re earmarking for the future go from your bank account into your investments. By doing it this way, there’s no risk of you spending that money.

    Having a separate emergency account usually with about three to six months of salary saved up will allow you to cover any unexpected costs without throwing your retirement plans out of whack.

    One goal for everyone should be to reach 65 debt-free. That includes credit card debt and especially the high-interest reward card kind car and mortgage loans, any student and other big loans. The reason is simple: you don’t want to be going into your non-earning years owing money.

    How Much To Expect From Social Security

    Retirement Account Strategy to Create a Tax-Free Income as taught by a Certified Financial Planner.

    So how much is enough retirement income? To figure it out, start by getting a handle on how much of your $100,000 annual income would come from Social Security benefits.

    Let’s say you’re 65. That’s the average age at which Americans expect to retire, according to the Employee Benefit Research Institute.

    If you retire this year, you’d probably be in line to receive $24,876 in annual Social Security benefits, according to the Social Security Administration’s quick calculator. That’s how much a 65-year-old worker would be entitled to, based on a typical career. Remember, Social Security benefits are based on your 35 highest years of income.

    You May Like: Can I Cash Out My 401k After Leaving My Employer

    Categorize Your Retirement Income Sources

    As you think about the retirement income sources available to you, begin grouping them into income categories such as lifetime, dividend, and interest income. Because of their predictability, many retirees use lifetime income sources to cover essential living expenses. Discretionary and unexpected expenses are generally more flexible than essential expenses, so your investable assets can help cover these costs.


    Severe market drops or prolonged periods of volatility can reduce portfolio value May not produce income adequate to outpace inflation and rising health care costs

    Limited liquidity and control of assets

    Additional costs associated with annuity and insurance products

    Q: I Just Retired Whats The Smartest Way To Draw Income From My Portfolio

    You have a half dozen or so accounts ranging from your 401 to your IRA, to your Roth IRA, to your brokerage accounts, each with different rules and regulations. Each also holds a variety of investments, from individual stocks and bonds to mutual funds and ETFs. So, yesit can be very confusing to know what to take from where.

    Thankfully, my colleagues at the Schwab Center for Financial Research have created a priority system. Their goal is to help you make decisions that minimize your taxes while also protecting your portfolio for the future. In Question 22, #7, on page 195, I gave you the CliffsNotes version. Now Ill go into some more depth.

    Before I get started, though, I want to reiterate a few essentials for managing your portfolio at this point in your life:

  • Give very careful thought to your asset allocation. You probably shouldnt be taking on as much risk as you did when you were younger, but I caution you not to avoid stocks, either.
  • Figure out how much money you need to withdraw to supplement your income from Social Security, a pension, real estate investments, or any other source. If you want your portfolio to last for thirty years, its prudent to cap withdrawals at roughly 4 percent.
  • Keep your most tax-efficient investments in your taxable accounts and your least tax-efficient investments in your tax-deferred accounts. See Question 5, page 69.
  • You May Like: How Do I Locate An Old 401k

    What Funds Should You Buy

    There are a variety of funds types to consider when saving for retirement. Here are the most popular options.

    Actively managed mutual funds

    These funds have been around for decades and are still the most-popular kind of security among retail investors. They hold a variety of stocks or bonds, and sometimes both, in one investment vehicle. Mutual funds are ideal for people who don’t want to choose their own stocks. Instead, a professional fund manager can do it for you. If you want to own a bunch of international stocks, but don’t want to pick individual companies, then buy an international stock fund. The same goes for tech stocks, U.S. stocks and corporate bonds there’s a fund for everything. The main drawbacks are fees and flexibility. Because someone else is doing the stock picking, fees are higher on actively managed mutual funds than on other kinds of investment vehicles. You also can’t buy or sell them during the day as they’re only priced after the market closes.

    Index funds

    Exchange-traded funds

    Target date funds

    Build your portfolio

    A lot of people like investing on their own, but when it comes to retirement savings it’s a good idea to work with a financial advisor who has a certified financial planning designation. Here are a few things to look for in a good advisor.

    Think about fees

    More articles

    Popular Articles