Key Takeaways:
- Build retirement income from multiple sources. Social Security, pensions, retirement accounts, investments, and other income can work together to support your retirement lifestyle.
- Plan around after-tax income and expenses. Understanding what you will actually have available to spend can help you identify income gaps and make better withdrawal decisions.
- Prepare for changes throughout retirement. Inflation, longer life expectancy, and the loss of a spouse can all affect your income, making regular reviews an important part of your plan.
You have saved your entire life for retirement. How do you turn your money into a reliable income source? Did you know that according to the Social Security Administration, 44% of women 65 and older who receive benefits get half or more than half of their income from Social Security?
Your goal is to tie all of your sources of assets together into a coordinated plan to provide uninterrupted income. Have you done that? Do you need help in doing that?
Why Relying on One Income Source Can Leave You Exposed
Diversification matters when it comes to investing and building a reliable income. Your various investments react differently to market fluctuations. Therefore, not having all of your assets in one type of asset can help avoid unnecessary volatility with your retirement assets.
Although Social Security can be counted on as a secure source of income, as can a pension (if you are eligible for one), Social Security was never designed to be your only or major source of income.
Think of your retirement income as a 3-legged stool: your personal retirement plans such as an IRA, 401(k), Social Security, and your non-retirement account assets.
Which Retirement Income Sources Can Women Draw From?
Social Security: A woman can have her own, spousal, survivor or divorced-spouse benefits. For more information visit: www.ssa.org and read up on Social Security. Social Security is a guaranteed source of income that helps keep pace with inflation.
Your Social Security options may be different depending on your marital history. If you are divorced, you may qualify for benefits based on your former spouse’s work record, provided you meet certain requirements. Widows may also qualify for survivor benefits based on a deceased spouse’s earnings history. Understanding which benefit you qualify for, when to claim it, and how it coordinates with your other income sources can make a meaningful difference in retirement.
Employer Pensions: Should you be eligible for an employer pension or your spouse/former spouse was, you need to know your options as to how to collect. A pension can be a solid source of income if you qualify for it.
If you have a pension, pay close attention to the payment options before making an election. Some pensions offer a single-life benefit that pays more each month but stops when you die. Others offer joint-and-survivor options that continue payments to a surviving spouse, although the monthly benefit may be lower. The right choice depends on your household’s other income sources, expenses, and survivor needs.
Workplace Plans and Traditional IRAs: Did you work at a company that offered a retirement plan? Was it a 40(k) plan? Do you have an Individual Retirement Account (IRA)?
Roth Accounts: A Roth IRA is a form of a retirement account that can provide tax-free income if you follow the IRS guidelines.
Taxable Investment Accounts. Although you do not get any tax advantages with this type of account as you would with a traditional IRA, having this type of account can offer benefits by allowing you to choose from which account to take money from during your retirement.
Annuities: Annuities can offer income that lasts as long as you are living. Doing your research on these accounts will allow you to determine whether annuities are right for you.
Part-Time or Other Earned Income. Will you be able to or want to work during your retirement in order to support yourself? Where will you be working?
How to Match Income Sources to Your Expenses
Matching your money to your expected expenses is a task that very few people undertake. The goal is to match your ongoing expenses with assets that are readily available and not invested aggressively. Expenses that are far out into the future can be matched with income sources that are more aggressively invested.
Your essential expenses include: housing, food, utilities, healthcare, utilities, etc., should be matched with income sources such as Social Security and any pension income you may be entitled to.
Non-essential expenses include: travelling, gifts, entertainment, can be matched to assets that are more aggressive than those for essential expenses. These expenses may or may not occur in the future.
It is prudent to keep 6-12 months worth of expenses in a “rainy day” fund/account. This is your emergency fund for items such as a new roof, major car repair or unexpected expenses of any kind. This fund should be kept in a conservatively managed account. Don’t take investment risk with this sum of money.
As an example, if your monthly expenses are $5,000 and you get $2,500 from Social Security, $2,000 from your IRA, you still have a $500 gap that needs to be addressed. Where will that money come from? Do you have money in a non-retirement account that you can use to fill gap?
What If Your Retirement Income Doesn’t Cover Your Expenses?
If your expected income falls short of your monthly expenses, you need to identify how that difference will be funded. You may be able to draw from taxable investment accounts, adjust discretionary spending, delay certain retirement expenses, or reconsider when to claim Social Security. The important thing is to identify the shortfall before retirement rather than discovering it after your paychecks stop.
You should also consider whether the gap will change over time. Some expenses may decrease as you get older, while healthcare costs and other expenses may increase. A retirement income plan should account for those changes instead of assuming your spending will remain the same every year.
Why Taxes Change How Much Income You Can Spend
Nothing is certain in life but death and taxes as Benjamin Franklin said. Therefore always think in terms of after-tax numbers not before-tax numbers. The long-term effect of taxes on your planning can be significant.
Withdrawals from your retirement accounts will be subject to federal income tax as well as state income taxes. Roth IRAs are not subject to taxes. Taxable accounts may be subject to what is known as capital gains tax. Even Social Security benefits may be taxable to you.
The order in which you withdraw money from your accounts can affect how much of your retirement income you keep. For example, taking a large distribution from a traditional IRA may push more of your income into a higher tax bracket or affect the taxation of your Social Security benefits. In some situations, using taxable investment accounts or qualified Roth IRA distributions may provide more flexibility. Coordinating withdrawals across different account types can help manage your tax burden over the course of retirement.
Planning for Inflation, Longevity, and Survivor Income
Not to sound morbid, but inflation is like cancer, it does not kill you immediately, but over time, it can do serious damage to your economic situation. A woman who retires at age 67 can on average expect to live for another 20 years. What will rising prices do to your purchasing power over a 20 year period of time?
Inflation also affects how much income you may need to withdraw from your investments over time. An amount that comfortably covers your expenses today may not provide the same purchasing power 10 or 15 years from now. Your retirement income plan should account for rising costs while balancing the need for long-term investment growth with the need to protect money you will spend in the near future.
Are you prepared financially as a sole survivor:
Your income will most likely be reduced once your partner dies because you will only be getting one Social Security payment. Add the fact that your tax filing status will change to an Individual which may cause you to pay more in income taxes.
This is particularly important if you have relied on your spouse to manage the household finances. Make sure you understand where retirement accounts are held, how to access them, who the beneficiaries are, and what income you can expect if your spouse dies first. Having these details organized ahead of time can make an already difficult transition easier to manage financially.
If your partner was entitled to a pension, the elections that were chosen matter. What type of benefit are you entitled to?
How to Find the Gaps in Your Retirement Income Plan
What steps should you take in order to determine whether you will be financially OK for the remainder of your life?
- List every expected source and when it starts.
- Total your essential and discretionary spending.
- Compare the two after taxes.
- Name the gap and which source is meant to fill it.
- Test what happens if one source shrinks.
- Review the plan every year and after any major life change.
Stress-Test Your Retirement Income Plan
Looking at your expected income and expenses under normal circumstances is a good starting point, but you should also consider what could happen if things don’t go as expected. What if the market declines shortly after you retire? What if you live longer than anticipated? What if your spouse dies and your household income changes? What if healthcare costs increase?
These scenarios can help reveal weaknesses in your retirement income strategy. You may discover that you need a larger cash reserve, a different withdrawal strategy, or a plan for replacing income that could disappear. Reviewing these possibilities while you still have time to make adjustments can help you prepare for unexpected changes.
At Retirement Solutions, our goal is to assist you in identifying where you are financially and whether you are on track to meet your retirement goals.
We help you decide what matters now, what can wait and what not to worry about.
FAQs
1. Can Social Security Cover All of My Retirement Expenses?
Income Replacement: Social Security typically replaces only about 40% to 43% of an average worker’s pre-retirement income. Financial experts generally advise that you need 70% to 90% of your pre-retirement income to maintain your lifestyle.
2. Is There a Right Monthly Income for a Woman in Retirement?
There is no single “right” monthly income for a woman in retirement because targets depend heavily on individual lifestyle, location, health costs, and personal savings.
3. How Often Should I Review My Retirement Income Plan?
Review your retirement income plan at least once a year, with more frequent check-ins triggered by major life changes or market shifts. A plan not revisited is of no value to you.
4. What Happens to My Retirement Income If My Spouse Dies?
Your household income may change significantly after the death of a spouse. You may become eligible for survivor Social Security benefits, but you generally will not continue receiving two full Social Security payments. Pension income may also change depending on the survivor benefit election made when the pension began. Your tax filing status and household expenses may change as well, so it is important to understand how these factors could affect your finances.
5. How Can I Make My Retirement Income Last Throughout Retirement?
Start by identifying your essential expenses, estimating income from Social Security and pensions, and determining how much you need to withdraw from your investments. Account for taxes, inflation, healthcare costs, and the possibility of living longer than expected. Reviewing your withdrawal strategy and adjusting your spending as circumstances change can help support your income needs over time.
Building a Retirement Income Plan That Works Together
At Retirement Solutions, we help women bring all the pieces of their retirement income together into a plan that supports their needs today and accounts for what may change in the years ahead. That means looking at Social Security, retirement accounts, pensions, investments, taxes, and everyday expenses to understand where your income will come from and whether there are any gaps to address. For over 40 years, we have helped clients make informed financial decisions through education and personalized guidance. If you would like to discuss your retirement income and what it may take to support your future, schedule a no-obligation, no-cost 15-minute telephone conversation through Let’s Discuss Your Financial Future.