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Construct your Income in Retirement

After spending years accumulating wealth, turning that wealth into income can be overwhelming.

1Designate a central account to receive your streams of income. This account should be distinct from the checking and savings accounts you access regularly. It is a kind of "fortress" account to aggregate portfolio income and should be off limits for spending purposes. If maintaining that discipline is difficult for you, keep the money in a money market at the fund company or another banking institution that you can "forget” about. Ideally you want it earning interest.

The danger of co-mingling money that belongs segregated from your spending accounts is that you will overspend.  This is human nature.  The central account protects us from being our own worst enemy.

2)  Set up a monthly Automated Clearing House distribution between this central account and your spending account. Simply provide the institution with the routing and account numbers for your spending account. ACH transfers require 2-3 business days and are free of charge.

3)  Direct all interest, dividends and capital gains payments from non-qualified accounts to the central account.

4)  If you are taking distributions from a Traditional IRA or pre-tax employer sponsored plan, open a qualified money market account at that institution. Direct all interest, dividends and capital gains payments to that money market. You should be able to do this online or by calling the firm.

5)  If you are 70 ½ or older, direct your Required Minimum Distributions to your central account each January.

6)  If you plan on taking withdrawals from a ROTH account, direct all interest, dividends and capital gains to a money market in that ROTH. If not, continue to let this account grow tax-free as long as possible.

NOTE:  Directing portfolio income in "tapped" accounts to money markets is a risk management technique.  This cash cushion reduces the need to sell beaten up investments during poor markets.

7)  Review the "forgotten” central account quarterly. Replenish it by taking money from your retirement accounts as needed. Consider taxes in determining from where to make your withdrawals: non-qualified vs. pre-tax vs. ROTH.

  • First tap the money markets in those respective account "pools".
  • Then sell shares for any additional funds needed from that pool.
  • Next withdrawal from the next pool, first taking cash then selling shares as needed.

Most of us are accustomed to being paid through direct deposit. Social Security and any pension plan will probably pay you the same way.  Direct these payments to your spending account.

Any payments from an annuity that you have annuitized should go to your spending account.  (The logic is that you annuitized because you needed that money.)

Rents are likely to be deposited to your spending account the old fashioned way via check.

NOTE:  Continue to maintain an adequate Emergency Fund.  Some advisors recommend keeping the equivalent of 2 to 4 years of living expenses in cash reserves.  The thesis is a cash "cushion" gives retirees peace of mind; keeping you invested through tough markets.  The problem is the cash "drag" means you deplete assets sooner.  


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