Editors' pick: Originally published Oct. 13.
After spending years saving for retirement, many of us will have a pretty nice nest egg.
Sure, surveys say most Americans have not saved nearly enough for retirement. But still, many people who have an employer-sponsored 401(k)or 401(b) have been religiously making contributions. And some have accumulated impressive savings for retirement.
But, in recent years, as companies have moved swiftly away from pensions that provided, for many, guaranteed income for life. That means that today, things are very different. Few big companies today have employee pensions. That means most people have to figure out retirement on their own, through company-sponsored 401(k)s or Individual Retirement Accounts.
The problem is that after saving for years, most of us have given little though to how they will withdraw that money in retirement. And most 401(k) plans today are not built to provide a stream of income in retirement.
Financial planners say that is a big flaw in many people's retirement plans. If you don't have an income plan for your nest egg, no matter how much money you have saved, you will place yourself in danger of not only facing big and unexpected tax bills, but worse, outliving your money.
"That's the single biggest question I get from clients -- am I going to have enough money to live on?" says Josh Giuliano, a financial advisor at Citizens Investment Services in Cranston, R.I. "That's a universal concern. Is it going to be enough and how much can I take out to ensure it will be enough?"
"Long gone are the days you work for same company for 45 years, get a pension and collect Social Security," he adds. "It doesn't really happen. Many companies that used to offer pensions aren't offering pension."
In fact, 50% of Fortune 500 companies used to offer pensions, he says. Now, only 25% do.
"People have to be creative," he says. "The responsibility for providing a lifetime of income for employees has been shifted to employees from companies."
The problem for most is that they have given little or no thought to turning their retirement nest egg into a steam of income. Most wouldn't even know where to begin.
"If you have a retirement account, that doesn't mean you have a retirement plan," says David Evans, at Evans Financial Group in Shreveport, La. "80% of people come in say I have a 401(k), and maybe, a pension. They haven't calculated how this will produce an income stream and if this income stream enough to maintain their lifestyle."
"You have to have some idea as to what this bucket of money will produce," he adds.
Giuliano, meanwhile, says the key is to begin planning early.
"What's important for people is to work on planning early," he says. "The earlier the better. Start five to ten years before retirement to get a sense for what your needs will be in retirement to maintain your lifestyle. Get a baseline of your budget and what it will cost in retirement. Take an inventory of your sources of income will be. Will you have a pension. Will you have Social Security. What (amount) of Social Security they you get. If there is a gap, how will a bridge that gap? That's where portfolios come in."
A guaranteed stream of income is critical, says Evans.
"You've got to have a guaranteed income stream," he says. "You can't have that from a non-guaranteed bucket of money. You need to have stream so you have an income you cannot outlive. That's done with an annuity of some sort. It must be structured so you can't run out of money. If you live to 106, it'll pay you till you're 106. If you die three months into retirement, your spouse gets it."
"Studies say if someone has guaranteed income that will continue through retirement, their mortality is better than those who don't have income stream or erratic," he says.
Giuliano says there is nothing more important in retirement than creating an income plan.
"I suggest talking to an expert," he says. "Look at all your sources of income and assets. Are you in right vehicles? Have you diversified. In younger years you are accumulating phase. Then there's a transition to the distribution phase. Now you want to generate as much income as you can from your assets. Now, give thought to diversifying into different investment - more income-producing investments like bonds, preferred stocks, annuities, dividend paying stocks and, high-yielding CDs."
"Understand your sources of income," he says. "These all have tax implications now. Know where you have funds, and the most effective and efficient way of withdrawing your money."