Coordinating Your Finances

If you don't want to scale back your plans for retirement, you must be able to afford them. That starts with making investments before you retire so that the income is available as you need it. The second and equally important part of the job is managing the income so your financial life runs smoothly.

All in the Timing

There's a big difference between a regular source of income – such as a Social Security check that's direct-deposited in your account each month – and income that's less predictable or even unexpected, such as an inheritance. Extra money can come in handy, but you can't depend on it to pay your bills.

But if you've planned ahead, your investments can play an important part in providing additional regular income to offset predictable costs – the ones that are due every month or quarter.

You can get regular income from investments in several ways, based on the kinds you own. Some, like bonds, may pay interest on a regular, predictable schedule. A number of stocks pay quarterly dividends. You can also set up a system of regular withdrawals from various mutual funds, or use cash to buy an immediate annuity, which can provide fixed or variable income paid out in regular, usually monthly, installments for a specific period of time, for your lifetime, or for two lifetimes.

Adding Up the Income

The big question is whether your combined sources of income will produce enough money, year in and year out, for as long as you need it. The answer is that they can, if your return, or earnings on those investments, is greater than the rate of inflation.

For example, several well-known companies have paid dividend income to shareholders for years while the market value of their shares has fluctuated. If you owned enough shares, you could count on the quarterly dividend payments to help cover some of your predictable costs. You could also sell some shares when the price increased a certain percentage and add the proceeds to an income-producing account.

On the other hand, growth rates aren't predictable and dividends aren't guaranteed. So there may be periods when income and growth slows or drops. That's why experts caution it's essential to own a variety of investments, including some that guarantee a steady, if less than spectacular, rate of return.

Managing Your Income

If you have a varied portfolio of investments in place as you approach retirement, you'll make out best if you know how to tap them in the most productive ways. Here are some of the things to consider:

  • Learn the difference between investments designed to be depleted, or used up in your lifetime, and those better suited to building an estate.
  • Create a withdrawal schedule to help ensure that your assets last as long as you need them, usually for your estimated lifetime and perhaps your spouse's estimated lifetime as well.
  • Compare the tax consequences of different types of investments so you get to keep more and pay Uncle Sam less over the years.

Deplete or Preserve?

Deliberately spending money so there's nothing left when you die makes a lot of sense – if you're not running through your assets so fast that you end up short. Depleting your resources is the principle on which mandatory withdrawals from certain tax-deferred investments is based.

For example, the government requires you to set up withdrawals from your traditional IRAs so you're using up those assets during your lifetime. Making regular withdrawals from your annuities, which are also designed as retirement income programs, works the same way.

In contrast, you can invest to build your estate, which means preserving rather than depleting your assets. You're free to leave your taxable investments untouched if you don't need the money, or you may choose to withdraw some of the earnings while leaving the principal to grow. Of course, there's nothing to stop you from investing both ways, building some accounts you intend to deplete to subsidize your retirement and others you intend to preserve to leave to your heirs.

Plan Ahead

One way to manage your budget to cover large but anticipated expenses, such as a new car or a new roof, is to funnel a portion of each month's total income into a special money market or savings account. You can use the same method to accumulate money for property taxes or insurance bills.

© 2004 by Lightbulb Press, Inc. All Rights Reserved.

This information is provided by Lightbulb Press, Inc. and does not express the views of Wells Fargo Funds Management, LLC, or any of its affiliates. Wells Fargo Funds Management, LLC, is not responsible for the accuracy, completeness, or correctness of the information provided by Lightbulb Press, Inc. or other third parties.

This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information. • Lightbulb Press, Inc., 112 Madison Avenue, New York, New York, 10016, Tel: 212-485-8800,

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