How to shift from saving to taking income for your retirement

Retirement planning means saving early and often while developing a balanced and diversified portfolio. Once you are within three to five years of retirement, however, reality sets in that your paycheck must be replaced with some combination of Social Security, pension funds, distributions from your IRA, annuities and/or pulling from an investment account.

“It’s kind of a shift,” says Adam Spiegelman, wealth management advisor at Northwestern Mutual. “The brakes come on, and you ask, ‘How do we draw down? How do we take income? Where does that paycheck come from?”

Smart Business spoke with Spiegelman about preparing for retirement.

If someone has a large chunk of money, is it better to invest it at once or spread it out?

If you’re moving money over from an existing 401(k) or IRA, it’s best to invest it at once. If it’s cash, like from a home sale or inheritance, it’s better to invest it over a period of three to four months, which helps mitigate against market volatility.

What is the appropriate strategy for providing financial gifts?

First, make sure you’re squared away for your own retirement.

After that, it depends on the needs of your dependents. Some might be OK financially, while others may need help. Be sure to keep score in your estate plan as you gift. If you help a child or grandchild, earmark that amount so everything is equitable in the end.

Wealthier couples also may gift out of their estate to mitigate a future tax exposure. Under normal circumstances you would only consider this for the final 10 or 15 years of your life. You don’t want to gift too early and be left short of funds.

How and when do annuities work?

Annuities are like private pension plans that provide a guaranteed source of income, which can help even out cash flow. With an annuity as part of your portfolio, you can be strategic with how you pull from investment accounts. If the market is down, you can let your account build back up and live on the annuity income.

If, however, you’re unhealthy and/or single, annuities are less attractive because you’re paying a large sum for income you only get for a short time.

How will Social Security affect retirement? When should you delay drawing upon it?

Social Security was never meant to replace your pre-retirement income, but it can help supplement it. There are numerous strategies for drawing Social Security. An increasingly popular one for many married couples is the file and suspend strategy, where the main breadwinner applies for Social Security at age 66 and immediately suspends payment. In most cases, this allows his or her spouse to collect half of their benefit, while the 66-year-old’s benefit increases by 8 percent every year until age 70 — a 32 percent total increase.

The key here is sit down with a Social Security consultant in conjunction with your financial adviser to make sure you aren’t leaving money on the table.

What do people need to consider when taking a payout option from their pension?

With pension plans, you’re provided with a number of payout options, including a lump sum. It surprises many that you might do better investing the lump sum versus taking the company’s offered annuity. This depends on numerous things like the current interest rate environment, inflation protection within the pension plan, the company’s financial strength, etc. It’s best to discuss this thoroughly with your financial adviser.

How can you invest conservatively, securing your nest egg, while still beating inflation?

Inflation should be considered, since it can easily erode your retirement. Often, people underestimate the power of inflation, but even a small amount can become significant over a 10- or 20-year period.

With the help of your adviser, you can be diversified and conservative in the markets, employing investment vehicles like mutual funds, dividend-paying stocks, bonds or treasury inflation protected securities, while protecting your buying power over the course of your entire retirement.

Insights Wealth Management is brought to you by Northwestern Mutual

Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries. Spiegelman is an insurance agent of NM and Registered Representative of Northwestern Mutual Investment Services, LLC (securities), a subsidiary of NM, broker-dealer, registered investment adviser, member FINRA and SIPC.