Your Questions, Answered: Paycheck in Retirement

December 22, 2020

On this week’s episode of Your Questions, Answered Patrick Shaw and Brian Leitner discuss income during retirement, and answer the following question:

“I’m getting ready to retire. What do I need to consider to generate a paycheck in retirement?”

Do you have questions you’d like answered? Email them to QA@marinerwealthadvisors.com, and we’ll provide answers.

Transcript:

Brian Leitner: You have questions? We have answers. Back with another quick clip. So the question that came in, this individual is asking about income generation and really more the considerations things to think about when trying to generate income in a low interest rate environment like we’re in today. What are some of your thoughts? 

Patrick ShawYeah, I think that’s a great question and certainly very timely. I think we’re getting a lot of these questions today in the current environment, obviously, folks are, are continuing to retire and I would touch on a few different bullet points, Brian. And the first one that I always remind people is income generation is far different than yields. And often times, these two terms are used synonymously, but they’re very different. The second point I always like to make to clients is listen, you spend dollars, right? Not percentages. And again, it kind of ties back into that yield versus income, conversation. But most importantly is, really starting with a plan for a client. And, and with that, we need to take a look at everything they have going on. We want to factor in their current sources of income, right? Whether that’s a pension, social security, rental income, deferred compensation, along with portfolio income, and really just take an inventory of everything that they have currently from there, we can really start to identify where the opportunities are to start driving income from their portfolio and taking into consideration things like the types of accounts they have. If they have trust accounts, are they IRAs, are they Roth accounts, and in evaluating the different risks. I know a lot of folks and rightfully so with the rollercoaster ride we’ve been on with the markets are mostly concerned about market risk, but the reality is there’s a lot of risk when we’re planning for income that we need to evaluate for a client, right? There’s inflation, there’s credit risk. There is market risk, there’s liquidity risk, longevity risk, right? There’s just so many different things that we need to look at and evaluate for each individual client and really kind of customize what that plan looks like to them. 

Brian: That makes a lot of sense. I mean, what are some of the, besides the vernacular maybe that people may make mistakes on? What are some of the other things that investors might overlook when it comes to generating retirement income and having that plan? 

Patrick: Yeah. That’s another good question. So the first thing I think that oftentimes, we kind of get sucked into is what I would call a yield trap, right? Going out there and looking for instruments that pay the highest yield. And that can be very misleading. There’s a big difference between, let’s say a stock that has a five or six percent dividend that is only showing that simply because the sheer price is really depressed. The reality is the cash flow and the earnings and the growth of that cash flow or dividend increases may not really be sustainable, or maybe doesn’t provide for a good solid long-term income plan. So, oftentimes we know there’s no free lunch, right? So if there’s something that’s too good to be true, if something is paying a substantially higher yield today than maybe what a risk free asset might be, that’s something that we certainly have to take a look at. The second component, I think that people often fall into from a trap perspective is not understanding or factoring in tax liability. Right? So for example, again, if I have a trust account, do I really want to own a lot of my corporate bonds or taxable bonds in that trust account. That may not be the most efficient place to hold those at the end of the day, it’s about how much money do I get to keep, or how much do I get to spend or pass on to my family. It’s not always about what shows up on my performance report or, how much actually hits the account, but how much of those things do we get to keep. And really what it comes down to is, you know, not to be cliche, but we want diversified sources of income, right? We want, dividends from stocks. We want to be able to take capital appreciation or capital gains. We want interest from bonds. Maybe we want some options premium, whatever it might be. We want a lot of sources of income throughout our retirement years so that we don’t get pigeonholed in and have too much risk kind of sitting in one area at the end of the day though, Brian, I think that the best thing to do, is really put together an overall plan that takes into context, everything that the client has going on to ultimately figure out, how do we reprint that paycheck for them and make that sustainable throughout their entire life? 

Brian: That’s terrific. I love the summary too. It all starts with a plan. What are your goals? What’s important to you? Then you build that portfolio. And then around that portfolio, what could income potentially look like? And you hit the nail on the head outside of the additional risks, the taxes, what are you actually taking home? Do you have the right income producing assets in the right accounts? And what does that ultimately look like even as you receive those distributions over the long-term? So, Patrick, thank you very much for being here. Really appreciate your expertise. 

PatrickThanks, Brian. Stay well. 

Brian: And if you or anyone else has questions, they’d like answers to. Please feel free to email us at QA@marinerwealthadvisors.com. Thanks for watching. 

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