New insights on retirement income

Posted by on June 7, 2011 @ 9:21 am in Retirement

We’ve just launched some new content on vanguard.com designed to provide insights into generating and taking income in retirement, and we’re interested in hearing your thoughts about it.

Our new web content is based on 3 ideas. First, if you’re comfortable with your existing portfolio, the question may be how to generate a reasonable income from your portfolio in a tax-efficient way. The process starts with redirecting income distributions (i.e., dividend and interest income) from taxable accounts into a cash buffer account, such as a money market fund. You would then direct withdrawals from tax-deferred accounts into that same cash buffer. Over time, you also need to think about how quickly you are “spending down” your savings.

A second idea is that you might want a professional fund manager to distribute regular income for your portfolio. That’s where our content on Vanguard Managed Payout Funds comes in. These funds have a dual purpose: to generate income distributions over time and, potentially, to grow capital in the long run.

A third idea is that you might feel you lack adequate guaranteed income in retirement. Guaranteed income sources include Social Security and employer-sponsored monthly pension checks. A tab on our new page points to Vanguard Annuity Access, powered by Hueler Income Solutions. There you can consider the merits of taking a portion of your savings and allocating it to one or more insurance company annuities. (For a broader discussion of the role of annuities, see this post I co-authored with my fellow blogger John Ameriks.)

The process of generating retirement income may seem complex. But at a high level, it can come down to 3 simple strategies: generating an income stream from existing taxable and tax-deferred accounts, investing a portion of savings in a prepackaged fund that distributes income as part of its fundamental objective, or purchasing additional guaranteed income though immediate annuities.

If you have your own way of thinking about generating income from your assets, or have comments on our new content, we’re certainly interested in hearing from you. Please share your thoughts.

Notes:

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

• Vanguard Managed Payout Funds are not guaranteed to achieve their investment objectives, are subject to loss, and some of their distributions may be treated in part as a return of capital. The dollar amount of a fund’s monthly cash distributions could go up or down substantially from one year to the next and over time. It is also possible for a fund to suffer substantial investment losses and simultaneously experience additional asset reductions as a result of its distributions to shareholders under its managed distribution policy. An investment in a fund could lose money over short, intermediate, or even long periods of time because each fund allocates its assets worldwide across different asset classes and investments with specific risk and return characteristics. Diversification does not necessarily ensure a profit or protect against a loss in a declining market. The funds are proportionately subject to the risks associated with their underlying funds, which may invest in stocks (including stocks issued by REITs), bonds, cash, inflation-linked investments, commodity-linked investments, long/short market neutral investments, and leveraged absolute return investments.

• Before investing, consider the Managed Payout Funds’ investment objectives, strategies, risks, fees, and expenses. Visit vanguard.com for a prospectus containing this information. Read it carefully.

• An investment in a fund could lose money over short, intermediate, or even long periods of time because each fund allocates its assets worldwide across different asset classes and investments with specific risk and return characteristics. Diversification does not necessarily ensure a profit or protect against a loss in a declining market. The funds are proportionately subject to the risks associated with their underlying funds, which may invest in stocks (including stocks issued by REITs), bonds, cash, inflation-linked investments, commodity-linked investments, long/short market neutral investments, and leveraged absolute return investments.

• Variable annuities are long-term investment vehicles designed for retirement purposes and contain underlying investment portfolios that are subject to investment risk, including possible loss of principal. Before making any decision to switch to another annuity—including the Vanguard Variable Annuity—you should consider annual maintenance fees, surrender charges, death benefits, and the financial strength of the insurance carriers.

• If you take withdrawals from a variable annuity before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.

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