The New Rules of Retirement

Chapter 3Securing and Maximizing Guaranteed Lifetime Income

The most important financial goal of retirement planning is to establish a secure stream of income or cash flow that will meet your spending needs for the rest of your life. Too often, people lose track of this goal amid all the talk about how much to save, how to invest, and other topics. The ultimate goal is to generate reliable income to pay your expenses for life, what I call establishing your retirement paycheck. The more income that can be guaranteed for life, the more financially secure and independent you'll be.

Establishing a lifetime stream of income in retirement was easy for the first post–World War II generation of retirees. Most of them had Social Security and pensions from their employers providing a floor of guaranteed income. With their own savings, they invested in a collection of safe income investments, such as certificates of deposit, treasury bonds, and tax-exempt bonds. They might have taken a little risk with utility stocks, high-dividend yield stocks, and corporate bonds. Such portfolios generated a lot of income, and the principal value didn't fluctuate much. The income and portfolio didn't have to last too long, because most people were retired only 5 to 10 years.

Things are different today. The foremost difference is that yields on most investments have been at or near historic lows for most of the time since 2000. A very valuable portfolio is needed to generate a high income from the investments ...