On March 31, I was in New York City as a member of a panel speaking with a group of financial advisors on the issue of retirement income. Being back in the city brought back a lot of great memories, and it was fantastic to walk around my old neighborhood with my wife and our two young children.

I’ve been working on various aspects of retirement issues for more than 15 years now, both at Vanguard and before that in NYC, and I’m still amazed at how badly people want to think that there’s a “product” answer to retirement. I guess the grand vision is that people will get to retirement, drop everything, and put all their money into a perfect solution.

This type of thinking ignores the fact that many people are invested in assets with embedded gains and tax liability, making it costly to alter strategies. Investors are also generally—and reasonably—reluctant to abandon whatever investment strategy got them to the point where they finally feel comfortable retiring.

So how does one effectively navigate retirement without a total solution? Maria Bruno of Vanguard’s Investment Strategy Group does a great job listing the ways, but I think it starts with two key ingredients:

1. Social Security is the base. Income for life, guaranteed by the government, and indexed to inflation. This is your safety net, and it’s what allows you to take risk with your own investments in retirement. Its importance to retirees is underscored by current events, and in my view, reports of its demise have been greatly exaggerated. Unless you’re physically unable to work, think about waiting as long as you can to retire and to claim this benefit. For most people (if not most investors), it’s the most valuable asset they own.
2. Your taxable investments provide income—consider using them first. Think about taking distributions from your taxable funds and other investments as cash and depositing them in a money market account or a bank account. This is the money you should consider spending first. That doesn’t mean you should shift to funds with high dividends or distributions; you can—and should—continue to hold a balanced portfolio. But you’re paying taxes on your fund distributions as you receive them. Send them to a money market account, and then you can spend from there. If your investments (and other sources) are throwing off too much, you can reinvest that money to rebalance the portfolio.

If Social Security, plus your taxable distributions, plus any other income (a part-time job, pensions, rental property, RMDs after age 70½, etc.) isn’t enough to meet your needs, there is of course more work to be done. That starts with making sure that your needs are realistic, and then deciding whether your resources allow additional spending.

Generally, a relatively simple systematic withdrawal strategy (one that you will revisit at least annually) from your existing portfolio can meet most needs. But if you want to simplify things further, you might want to consider payout or other balanced funds as a part of the strategy. If you need additional guaranteed income, a simple, traditional immediate annuity (with an inflation rider) might also be appropriate as a part of the solution. Maria’s paper does a great job of talking about the various options that can be employed.

The bottom line: You don’t have to reinvent the wheel when you retire. Although you wouldn’t know it from reading the financial press, people have been retiring for years, and managing their finances quite well without newfangled options. A combination of Social Security, investment income, systematic withdrawals, and other options can work quite well, and give you great flexibility to change strategies when appropriate.

Though they may not be a “perfect” solution, they are workable, flexible, and tried and true—something that newer solutions can’t yet claim.


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