Key Takeaways:
- Retirement income planning is about turning your savings, investments, and benefits into a steady, predictable stream of money that can last as long as you do.
- The challenge is dealing with future uncertainty, such as inflation, taxes, longevity, healthcare costs, and investment volatility.
- Retirement income planning is also about preparing for 20-30 years of unemployment, otherwise known as retirement. Are you prepared for 20-30 years of unemployment?
How Much Do You Need To Support Yourself While In Retirement?
As the saying goes, different strokes for different folks. You are unique, not a general random number that you might read about. You need to be very specific as to what your number is.
You need to identify the difference between your expenditures and what your income can provide. This is where reality matters. You need to be very honest with yourself regarding any gap between what you spend and what you have coming in as income.
The Difference Between Fixed Income Needs And Flexible Spending
Fixed income needs include items such as: housing, utilities, food, insurance, taxes, healthcare, etc.
Flexible income needs include items such as: travel, dining out, hobbies, home projects, gifts, and any other items that can be adjusted if circumstances change.
In this way, you can clarify which expenses need to be tied to dependable income as opposed to those items that can be tied to flexible income sources.
Account For How Spending Can Change Over Time
Think about how retirement changes by the following: at first there are the “Go, Go Years”, followed by the “Slow Go Years,” and finally come the “No Go Years”.
Retirement spending never stays the same from the first year in retirement to the last year in retirement.
Early retirement usually includes traveling, hobbies, home projects, family visits, and other lifestyle spending. These are the “Go, Go Years”.
In our middle retirement years, we begin to slow down due to our physical abilities. These are the “Slow Go Years”. Our spending tends to drop.
Finally, in later retirement due to declining health, our need for income tends to rise to pay for healthcare-related issues. These are our “No Go Years”.
What Income Sources Can You Count On?
Once you know how much income you will need, the next step is to identify from which source(s) this money will come from.
Social Security, pensions, annuities, etc., are good sources for dependable income.
Your goal is to identify sources of dependable, recurring income.
When Should You Claim Your Social Security Benefits?
Social Security can be a significant source of income for you. Therefore, knowing when to claim your benefits can be crucial.
Claim too early, and you could cheat yourself out of hundreds of thousands of dollars over your lifetime.
Social Security is no longer a simple program to understand, and trying to get in touch with Social Security employees is nearly impossible. You need to arm yourself with knowledge that is correct for your personal situation.
When Should You Use Your Investments To Fill Any Income Gaps That You May Have?
After your spending needs and reliable income sources have been identified, you can then turn to your investments to cover any remaining needs for money.
Establishing a formal withdrawal strategy will help you identify how much to withdraw, which accounts to withdraw from, and how to respond when investment markets or spending needs change.
Having a withdrawal strategy in writing is critical to maintaining a long-term, dependable stream of income.
Decide on How Much You Will Be Withdrawing Per Month
There are numerous methods for withdrawing money from your investments in order not to run out of money before you run out of time.
There is no “one size fits all” method.
Your best option is to employ an experienced and trustworthy advisor who can illustrate the numerous methods that you can employ so that you feel comfortable and secure with your retirement withdrawal plan.
Is There An Ideal Time To Take Money From Your Investments?
Taking money from your investments during a stock market decline can be devastating to your financial welfare.
A well-thought-out withdrawal plan can help preserve your investments during those times when the investment markets are struggling.
Retirement Solutions has been using a methodology for decades known as the 3 Bucket Method that can help reduce your exposure to down markets and preserve your investments for the long-term.
You Need To Think Long-Term For Your Investments
Never overreact to stock market gyrations.
Your investments should coincide with your income needs.
A properly diversified basket of investments, taking into consideration your risk tolerance and your time horizon, is your best method of preserving your wealth.
Are Your Investments As Tax Savvy As They Can Be?
Retirement income is about how much you get to keep after taxes, not how much you initially withdraw. The government wants part of what you withdraw.
Are you aware of how much of your retirement account(s) will be taken by taxes?
Do you have a plan as to which account you will take from first and how much to minimize the amount of taxes that you must pay?
Required Minimum Distributions (RMD), Are You Up To Speed On Them?
Having a large retirement sum to draw from is a blessing, but it can also be a nightmare if you do not know how and when to take it.
A large RMD can impact how much your Social Security payments are taxed. The same goes for Medicare surcharges.
Plan your RMDs prior to having to take them in order to reduce the tax ramifications.
Evaluate Roth IRA Conversions Very Carefully
Roth IRA conversions may help you reduce your future tax situation by moving money from traditional IRAs into Roth IRAs.
However, there is a tax implication to doing this. When you make the conversion, you must pay taxes on what you converted.
Discuss this issue with your tax professional before making any decisions.
Keep Your Plan Flexible For Upcoming Changes In Your Life
I tell my clients that I want to be their guide to an ever-changing landscape and not a follower of an outdated map.
Our lives change, and you must be prepared to do the same with your retirement plan.
Longevity, health events, inflation, taxes, family needs, housing decisions, and investment market fluctuations all demand flexibility in your retirement plan.
Protect Yourself Against Inflation And Living Too Long
Are you prepared for 20-30 years of unemployment? That is what retirement really is. 20-30 years of no working income.
Inflation is like cancer; it does not kill you in the short-term, but over time, inflation will decimate your retirement assets.
The greatest financial risk you face is the risk of outliving your money. Longevity and inflation are the risks you need to address in your retirement plan.
Are You Prepared For Large Unexpected Expenses?
Health events, home repairs, family support, new vehicles, and relocation expenses can put your retirement plan in jeopardy. Nearly every retiree will experience one of these events.
Does your retirement plan have an answer to these events?
Keeping 6-12 months’ worth of expenses as an emergency reserve in cash is prudent.
Better to be safe than sorry.
Your Life Changes, So Should Your Retirement Plan
When to review and alter your retirement plan depends on your personal situation. Has something in your life changed since the plan was created?
Regular reviews should focus on your current withdrawals from your investments, your tax situation, your monthly expenses, etc.
Your retirement plan should provide a degree of structure, yet be able to be modified as your life will inevitably change course. Flexibility is key!
Retirement Income Planning FAQs
1. What is retirement income planning?
Retirement income planning is the process of figuring out how to replace your paycheck once you stop working. It means looking at all of your income sources, your actual expenses, your investment accounts, and your tax situation and building a coordinated strategy that keeps money coming in for as long as you need it.
2. How much retirement income do I need?
Add up what you actually spend. Start with mandatory expenses like housing, food, healthcare, and taxes, then add discretionary expenses like travel and entertainment. That total is your number. The commonly cited rule of 80% of pre-retirement income is a starting point, not a substitute for doing the math on your own life.
3. What are the best sources of retirement income?
The strongest plans layer multiple sources together. Social Security is usually the foundation because it provides a lifetime, inflation-adjusted income you cannot outlive. Pension income adds stability if you have it. Annuities can cover gaps in guaranteed income. Investment accounts handle the rest and provide the growth needed to keep pace with inflation over a long retirement.
4. How do I know which retirement accounts to withdraw from first?
The general sequence is cash reserves first, then taxable brokerage accounts, then traditional IRAs and 401(k)s, then Roth accounts last. But the right order for you depends on your tax bracket, your account balances, required minimum distributions, and long-term goals. Getting the sequence wrong can cost significantly more in taxes over time.
5. How can I make my retirement income last longer?
Keep 6 to 12 months of expenses in cash so you are never forced to sell investments at the wrong time. Match your fixed expenses to guaranteed income sources. Give your long-term investments room to grow. Stay flexible enough to reduce discretionary spending when markets are down. And review your plan at least once a year because a plan that does not adapt will eventually fall short.
6. Should I adjust my retirement income plan during a market downturn?
In most cases, yes. Continuing to withdraw the same amount from a declining portfolio puts extra pressure on assets that are already down and can shorten how long your money lasts. Having cash reserves set aside specifically for this situation gives you the flexibility to reduce or pause investment withdrawals until markets recover. Flexibility is not optional in retirement — it is part of the plan.
7. When should I start planning my retirement income strategy?
Earlier than most people do. The decisions that have the biggest long-term impact include how your accounts are structured, when you claim Social Security, and how your investments are allocated. That said, it is never too late. If you are within 10 years of retirement and do not have a plan, the time to start is now.
Create A Retirement Income Plan That Supports The Life That You Want To Lead
A well-designed retirement plan takes into account your expenses, Social Security, investments, taxes, longevity, inflation, as well as other factors, and creates a map that allows for changes along the way.
Keep in mind that you are an individual, not a number coming from a study that uses averages to dictate what you need to do. You are unique, and your retirement plan should reflect your uniqueness.
Working with a qualified and experienced financial advisor can help you devise a retirement plan to help you face your retirement with anticipation and not apprehension.
Let’s Discuss Your Retirement Future
For over 40 years, Retirement Solutions has been assisting women in viewing their financial future with anticipation rather than apprehension. We offer those interested a no-obligation, no-fee 15-minute consultation so that we can better understand your particular situation and whether we can be of assistance to you. Click the “Let’s Discuss Your Financial Future” link in the upper right corner of the Home page of the website.
You talk, we listen.