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The Three Strategies for Providing Reliable Retirement Income

June 04, 2024

The Three Strategies for Providing Reliable Retirement Income

Embarking on the journey towards retirement is a significant milestone, filled with excitement and anticipation for the years ahead. At Harford Financial Group, we recognize that retirement planning goes beyond merely accumulating wealth. It's about ensuring a lifetime of financial security and peace of mind. As holistic planners specializing in retirement income and tax management, we understand the importance of crafting a comprehensive income plan that addresses your unique needs and goals. This blog post will explore the three retirement income strategies: yield, bridge, and floor. 

At Harford Financial Group, we believe in the Bucket Plan. All three strategies fit into the soon bucket portion of the Bucket Plan. The goal of the soon bucket is to provide reliable income throughout your retirement. Using one or more strategies will build a robust financial foundation that can withstand market volatility and provide lasting security throughout your retirement. 

  1. Yield Strategy:

The Yield strategy focuses on generating income primarily from investments. These investments can include dividend-paying stocks, bonds, and other interest-bearing assets. This approach leverages the earnings potential of your investments to provide a steady income stream throughout your retirement. You need substantial assets in your soon bucket to achieve the best results from the yield strategy. When comparing this strategy to the other soon bucket strategies, you will need around twice the total assets to achieve the same results. 

Key features of the yield strategy include:

Diversification: Building a diversified investment portfolio helps mitigate risk and enhance stability. Dividend-paying stocks make up a large portion of these investments. 

Regular Income: Dividend and interest payments from your investments can provide a consistent income stream. This income can be subject to change during times of market volatility. 

Potential for Growth: Some investments offer the potential for growth over time, further enhancing your retirement nest egg.

  1. Bridge Strategy:

The Bridge or drawdown strategy aims to bridge the income gap from one time to another. Often, bridging strategies are used to bridge the gap between retirement starts and other income sources, such as Social Security or pension benefits become available. However, this strategy can be used even beyond this. This approach involves strategically drawing down assets from your soon bucket to provide reliable distributions. We will often use laddered bonds and CDs when implementing this strategy. A bond or CD will mature to fund the following year's income each year. The bridging strategy provides reliable income at a cost higher than the more aggressive Yield approach. 

Key components of the Bridge strategy include:

Stability: When bonds and CDs mature, the investor will receive the original investment amount from when the product was issued. This provides a reliable income if you continue to hold the bond or CD to maturity. 

Flexibility: Having a bridge strategy provides flexibility for when you want to access retirement accounts. Bonds and CDs are liquid investments. This allows for more flexibility if life happensand you need to access money sooner rather than later. 

Preserving Capital: By strategically drawing down assets in their soon bucket, retirees can allow their assets in their later bucket to grow without selling stock when the markets are down.

  1. Floor Strategy:

The Floor strategy prioritizes stability and security by establishing a base level, or floor, of promise-based income to cover essential expenses in retirement. This approach often involves utilizing income annuities that offer guaranteed income streams for life. Annuities provide incredible stability. It is necessary to remember that this stability comes at the cost of giving control of a portion of your wealth to an insurance company. When purchasing an annuity, you sacrifice liquidity for stability and promise-based income. 

Key aspects of the Floor strategy include:

Lifetime Income: Annuities provide a reliable source of income that continues for as long as you or your partner lives, offering protection against outliving your investments.

Risk Management: By securing a portion of your retirement income with guaranteed products, you can mitigate market volatility and sequence of returns risk.

Peace of Mind: Knowing that essential expenses are covered with guaranteed income can provide peace of mind and financial security in retirement. Your other soon-bucket investments can now be used to cover your discretionary expenses. This strategy can also make you more aggressive with your later bucket investments. 

Harford Financial Group is committed to helping you navigate the complexities of retirement planning. We want to be partners in crafting strategies that align with your unique goals and circumstances. Contact us today to learn more about how we can assist you in achieving a financially secure retirement.