Personal Finance Essentials

Generating Income in Retirement

Pension? Annuity? Withdrawal Plan? The Income Strategy You Choose in Retirement

Could Mean Thousands of Dollars a Year

Retirement Growth

Systematic Withdrawal Plans

One of the most effective ways to generate retirement income is through a Systematic Withdrawal Plan (SWP). Rather than drawing down savings haphazardly, an SWP provides structured, predictable monthly income from a diversified investment portfolio.

Compared to parking retirement savings in a one-year bank CD, a well-constructed SWP has historically produced income that is not only more stable but substantially higher – and the portfolio itself continues to grow. An SWP investor can increase their income each year to offset inflation while still preserving the value of the account over time.

Annuities

An annuity is simply a stream of income. Pensions and Social Security benefits are both annuities. In the commercial marketplace, insurance companies issue annuity contracts: you provide a sum of money and the insurer promises a stream of payments in return.

Immediate annuities begin paying income as soon as you hand over your money. Variable annuities invest in sub-accounts that mirror mutual funds, with returns that vary based on investment performance. Many feature income guarantees – typically promising 5% to 7% per year based on your original investment, even if the account value has declined. Fixed annuities work more like bank CDs, providing tax-deferred growth at a fixed rate.

There are important tax considerations with annuities. Withdrawals in excess of your original investment are taxed as ordinary income – often at rates higher than capital gains rates. Annuities also do not receive a step-up in basis at death, meaning your heirs could face significant tax liabilities. The tax benefit of an annuity is deferral, not exemption: someone will eventually pay taxes on the gains.

One common mistake: placing municipal bonds inside an IRA or other tax-deferred account. The tax-free nature of municipal bonds is completely wasted inside a tax-deferred vehicle, since all withdrawals from traditional IRAs are taxed as ordinary income regardless of where the money came from.