Retirement Income

Transitioning Your Retirement Strategy from Growth to Income

As you near retirement, itt’s time to switch your focus from saving to withdrawing. But transitioning your investments from a growth to income strategy after retirement can be tricky.

Stephanie Faris

Published April 30th, 2021

Key Takeaways

  • In preparation for retirement, you set up savings and investment accounts that are geared toward a “growth” strategy, which is increasing asset value and capital appreciation.
  • In retirement, an “income” investment strategy is better, which means you focus your assets on generating consistent money akin to a retirement paycheck.
  • By setting a budget and adjusting your finances, you can give yourself retirement security.

As you near retirement, one thing becomes clear. It’s time to switch your focus from saving to withdrawing. But transitioning your investments from a growth to income strategy after retirement can be tricky. It requires a little advanced planning to make sure your money stretches throughout your lifetime.

During your peak earning years, your retirement savings is likely geared toward growth due to the time horizon until you actually retire. You incrementally put money into assets that will hopefully experience compounding growth, knowing you have plenty of time to accumulate funds in those accounts. But investing doesn’t have to stop as you near retirement. The key is to shift your attention to assets that will generate income rather than relying on growth.

How to Transition Your Portfolio from Growth to Income

After retirement, it’s important to focus on transitioning growth oriented assets into ones that will produce income at retirement while taking on the least amount of risk possible. This is known as income investing. You can still put your money into stocks, bonds, or mutual funds depending on your investment objectives and tolerance for risk, but you don’t have time to recover from a big loss as you did in your working years.

This shift doesn’t happen overnight. Here are a few steps to help you prepare for transitioning from growth investments to income investments.

Budget For Your Expected Lifestyle

Budgeting is even more important once you’re living the retirement lifestyle. The best thing about a budget is that it can help you feel a little more in control of your finances. You can never start too early, either. The sooner you have a budget in place, the sooner you’ll know how much income you’ll need.

First, take a look at your current monthly expenses. If there are areas you plan to cut back, reduce those amounts, but chances are, most of your expenses will remain the same. Here are some areas where you may be able to cut back once you’re no longer working full-time.

  • Dining out. If you regularly eat meals in restaurants, you may find that retirement cuts your food expenses substantially. You’ll also have a little more time for cooking meals at home, if you choose.
  • Clothing. Chances are, you won’t need to keep your wardrobe updated once you’re no longer working.
  • Commuting. You could cut back to one vehicle and save some money. But even with your own car, driving fewer miles every day means lower fuel and maintenance costs. If you use public transportation, that daily expense will end, as well.
  • Housing. If you plan to downsize or pay off your home before retiring, you could see a reduction in this area and potentially even realize a windfall if you decide to sell your home.

But just as you’re cutting back, there may be some areas you want to boost in your budget. Travel, entertainment, and hobbies all cost money, so factor this in if applicable.

Maximize Social Security and Pension Benefits

You can likely count on some Social Security benefits after retirement. But if you can wait until full retirement age, which is 67 if you were born after 1959, you’ll max out those benefits. Electing benefits earlier will give you a reduced amount.

The same holds true if your employer offers a pension. Check the fine details and see how much more you’ll get each month if you wait a few extra months to retire. Weigh the benefits of that extra money against the thrill of retiring early.

Reallocate Your Portfolio Towards Sustainability

When you were younger, it was all about earning, earning, earning. But after retirement, you need to switch to generating income from your portfolio. That means it’s time to take a look at your investments and shift some things around.

If you’ve had your portfolio in place for a while, chances are, you know which assets perform consistently. Emphasize those and try to eliminate those assets that are losing money. Consider replacing those assets with something like an annuity, which can give you reliable income throughout your retirement.

Evaluate Your Risk Tolerance and Adjust

Losing money isn’t the only reason to tweak your portfolio. During retirement, you’ll rely on any income you’re getting. It can be stressful to watch your stocks drop in value when you need that money to pay bills.

Your risk tolerance will likely change as you near retirement. There’s no longer time for an asset to recover after taking a steep drop. Focus on safer investments like dividend-paying stocks, CDs, and high-yield savings accounts to save unnecessary anguish.

Final Thoughts

The best way to prepare for retirement is to work with a Certified Financial Planner® to make sure everything is in order. Your personal circumstances along with your time horizon and investment philosophy are unique to you and therefore it would be beneficial to generate a plan with a professional. It’s important to know exactly when to make the shift from a growth to income strategy so that you’ll be able to do what you need to in order to maximize your retirement funds.

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Author

Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.

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