Planning Your Retirement Income

Planning for retirement involves more than understanding Social Security and contributing money to your 401(k), IRA, or other retirement accounts. It’s just as important to consider how you’ll be managing your income, what you’ll be spending annually, and how you’ll make your money last once you put your working days behind you.

What is a good retirement income?

The truth is, there is no set number that is considered a “good” retirement income. This amount will be different for everyone depending on your pre-retirement income, lifestyle, and living expenses.

The IRS states that retirees may need at least 80% of their pre-retirement income once they leave the workforce. For example, if you are making $75,000 when you retire, you’ll need an estimated $60,000 per year to live comfortably in retirement.

Depending on your income before retiring, your actual financial need can be a lot lower or a lot higher than 80%. This article, when paired with a retirement income calculator, may help you estimate your need.

How does retirement impact living expenses?

Individuals who retire now can easily spend 20 to 30 years or more in retirement— meaning what you save now will have to last you a while.

Many find that their living expenses decrease in retirement due to:

• Downsizing: Many retirees decide to downsize their home, which reduces house payments, insurance costs, maintenance and upkeep, and more.
• Fewer transportation and work-related costs: Not going to and from work every day can save on transportation expenses, not to mention other work-related expenses like uniforms, supplies, and tools and equipment.
• No more dependents: By the time you retire, your children will likely be out of the house and financially independent, saving you money.
• Property taxes: Many states offer property tax exemptions for people over 65 years of age.

On the other hand, some people spend more in retirement because of factors like:

• More travel: Many retirees dream of traveling after their years of working. These leisure activities can come at a cost, however. When not budgeted properly, traveling expenses can quickly add up and eat away at your savings.
• Greater healthcare costs: As you age, your healthcare expenses will increase. Even with great insurance coverage, you can expect to pay more out of pocket each year as you get older and experience health issues and declining mobility.
• Higher taxes: If your income goes up because of retirement plan distributions, you may be liable for more annual taxes than you are used to.
• New hobbies and living upgrades: With extra time on your hands, you may find yourself tackling those projects you always wanted to do or taking on new hobbies.

A large retirement nest egg isn’t an excuse to go wild and spend with abandon. If you anticipate your living expenses to increase in retirement, it’s best to consult with a financial advisor who can help you determine a budget that will ensure you have enough to live on for the rest of your life.

Regardless of whether you expect your spending to increase or decrease, it’s also important to adjust your projected costs for inflation. Depending on the inflation rates during your retirement, this may mean your income would need to increase annually to maintain the same standard of living.

Retirement Income Strategies

There’s more to retirement income than what’s in your 401(k) or IRA. It’s also important to consider your investment strategy.

While high-growth opportunities are great to invest in while you are young, as you approach retirement age you should take a hard look at how and when you’ll be using your money in retirement. Most people convert their tax-advantaged retirement accounts into other assets after retiring.

Aim for a post-retirement portfolio that can give you a consistent stream of annual income while balancing potential, growth, and liquidity. It will take a variety of investments to build this kind of portfolio, which is why it is important to optimize your retirement strategy.

Generally speaking, you’ll need three elements in your retirement income plan:

1. A cash account for day-to-day expenses
2. Short-term reserves that can be used for emergencies, while still generating some income
3. Long-term assets for potential growth

Cash Account

Your cash accounts will cover your day-to-day expenses. Assets in this category are liquid, so you can use them at any time without incurring penalties or losses. Many people deposit their Social Security funds into a cash account to use as needed.

• Checking
• Savings
• Money market accounts

The downside to cash accounts is that there is little potential for growth. For this reason, it would be unwise to keep most of your money in a cash account.

Short-term Assets

Short-term assets can provide cash reserves and create consistent and predictable income. Investments in this category generally have guaranteed principal. Examples of short-term assets that you can take advantage of in retirement include:

• Treasury bills
• Certificates of Deposits (CDs)
• Short-term U.S. government bond funds

These assets fall between cash accounts and long-term assets in terms of liquidity and growth potential.

Long-term Assets

The main goal for your long-term assets is to potentially provide growth to help meet your financial needs throughout retirement and possibly build assets to pass on to your heirs. You may also use your long-term assets to create income, transferring them as necessary to short-term reserves or your cash account.

Examples of long-term investments are:

• Stocks and bonds held individually or in mutual funds
• Fixed and variable annuities
• Real estate and real estate investment trusts (REITs)
• Hedge funds and commodity investments
• Life insurance cash value

Worried how volatile market conditions can affect your long-term assets? A financial advisor can help you determine whether it might be a good strategy to invest some of your assets in bonds or other fixed-income investments as a way to help guard against inflation and market volatility. There are ways to diversify your portfolio that can help you balance rate of return and risk.

Plan for Tax Efficiency in Retirement

When you retire, taxes can be a major expense. Your financial advisor can help you create a tax-smart distribution strategy.

Everyone’s situation is different, however the general guideline for the order of withdrawals is:

• Taxable accounts first
• Tax-deferred accounts next
• Tax-free accounts last

Your situation and tax bracket may impact this order of withdrawals. While this is a good rule of thumb to follow, it’s important to take your financial situation into account.

Get Started on Your Retirement Income Strategy

The top retirement concern for most people is having enough money to cover living expenses for the rest of their lives. Retirement income isn’t something you should guess about— instead, enlist the help of an expert and take time to plan for your future.

The only constant in life is change. As important as it is to make a plan, it’s just as important to remember that circumstances can change and may require you to adjust your investment strategy. You and your financial advisor will want to monitor your investments and determine whether adjustments need to be made.