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How to Shift Your Retirement Nest Egg to an Retirement Income Stream

Saving for retirement is understood -- you invest a certain amount of your income to a portfolio that's aligned with your risk tolerance.

But once you're ready to retire and start living on that money, what steps should you take so your funds last?

It's a question people who are starting to retire now need to ask, because pensions and other traditional retirement income guarantees are less common, says Jamie Hopkins, director of the Retirement Income Center at The American College of Financial Services, in Bryn Mawr, Pennsylvania.

"The move from saving to spending down money is very challenging for a lot of people, and we're really just starting to see the first retirees that really had to do that," he says.

[Infographic: How to Start Investing in Your 50s.]

Before the decline of pensions, retirees may have saved money in certificates of deposit and bonds to supplement a lifestyle, not make it their main income.

"They really didn't have to manage the core of it and that's starting to change now and it will keep changing over the next 20 years as more and more people get to retirement and with (just) IRAs and 401(k)s," Hopkins says.

To be successful, it takes a change in mindset, he says, and a plan. The college surveyed retirement income specialists who responded that they find retirees and near-retirees underestimate retirement costs and retirees need to understand the unique risks they'll face now that they're not working.

Take your time. Ivan Hernandez, co-founder and managing director at Omnia Family Wealth in Aventura, Florida, says transiting from accumulation to distribution doesn't happen overnight. It should happen gradually.

"You need to be able to recalibrate that appreciation aspect with prudent asset allocation and that needs to be done over a multiyear process," he says.

Shifting nest eggs over time helps to avoid sequence-of-returns risks, or making withdrawals when returns are lower, he says. You need to have a cash flow and spending policy in place as you make the transition. "It would be horrific if the markets had a meltdown before you were able to institute that cash flow policy or that spending policy on your assets," he says.

This happened to pre-retirees and retirees during the 2008 stock market crash. Hernandez says someone who has $1 million in a nest egg and wants to use the standard 4 percent withdrawal rate, which would be $40,000 annually, would see a significant impact on his or her cash flow if their nest egg dropped to $800,000 because they were all in equities during a stock bear market.

He recommends investors start to dial back equity exposure by about 5 percent a year as they get closer to retirement and put it into safer asset classes. It may also mean building up cash reserves to help retirees weather bear markets.

"It's really not a bad thing to build up cash," he says.

He recommends his high-net worth clients have a year's worth of cash to cover spending, and admits that's not necessarily realistic for many people. But having at least three to six months' expenses in cash reserves can help people avoid tapping their nest egg at the worst time if the stock market suffers losses.

Hopkins says ideally people will start planning 15 years out, starting in their early to mid-50s, since people in their 50s have access to some financial resources -- like long-term health insurance -- that become difficult or impossible to access once they reach their 60s.

[See: 8 Simple Rules for Investing in Retirement.]

Rethink your asset allocation. As people start to shift their nest egg to a retirement income stream, consider stocks that pay dividends, says Anthony Geraci, managing shareholder of Geraci Law Firm in Irvine, California, specializing in banking and finance.

"If I'm ready to a tap the income stream, I'd start looking at stocks that pay dividends rather than just looking for the appreciation angle," he says. "Look at those stocks which have a steady rate of return historically."

Hopkins says consider other income streams besides equities. On the very safe side there are CDs, bonds and annuities, even life insurance and home equity, to act as a buffer in down market years. But that all requires a plan, he says.

Claiming Social Security. As tempting as it is to claim Social Security as soon as possible, wait if you can.

Depending on your birth date, full retirement age for Social Security may be 66 or 67, Hernandez says, but some people want to take it as soon as possible, which can be at age 62. Hernandez says by drawing down early, "you are actually sacrificing anywhere between 25 and 30 percent of those monthly flows."

If it's possible, use some of the other assets you have saved to live on, they say. If you can wait until either full retirement age, or optimally at the age of 70 where depending on when you're born, this can mean anywhere from 124 percent to 132 percent of what full retirement age income would be on a monthly basis, Hernandez says.

Another reason to wait is that Social Security may be most people's singular asset that is indexed for inflation, which helps maintain their purchasing power going forward, he adds.

[See: 7 Ways to Retire Without Social Security.]

While it can be more profitable to wait, waiting isn't right for everyone. Consider your current health and your family's health history when making that decision. If everyone in your family has not lived much past 75, then Hernandez says to claim Social Security as soon as possible.

Hopkins says these actions can give retirees a better sense of how to shift their nest egg to retirement income. "Choosing an income retirement strategy, making better Social Security claiming decisions, and addressing the market volatilities, those three things seem to give (retirees) more security," he says.

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