Retirement income planning: 5 steps to success
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We all know the importance of saving for retirement – and starting early – but what happens after you stop getting income from work? How do you take the money you’ve saved for retirement and start turning it into income? That’s what retirement income planning is all about: knowing when and how to withdraw your savings to create regular income to live on – and doing what you can to ensure that the stream of money lasts as long as you do.
Recent research from Guardian shows that a lot of Americans worry about that exact issue: 51% say they are concerned about having enough retirement savings to last through retirement – and 48% would like a guaranteed source of income in retirement. These 5 steps can help you master the basics of retirement income planning, so that the money you set aside for retirement can go further:
Identify sources of income in retirement.
Estimate your retirement expenses.
Come up with a spending/withdrawal plan.
Review, evaluate, and assess over time.
Adjust your plan.
Step 1: Identify sources of income in retirement
Retirement income can come from a variety of sources. Some sources of income may be guaranteed – like a pension – or non-guaranteed, like money invested in the stock market.
It's important to understand the different sources of income available to you and the tax implications for each. For example, funds that you withdraw after age 59 ½ from a traditional Individual Retirement Account (IRA) are generally taxed as income; funds withdrawn from a Roth IRA are not taxed (because that type of account is funded with after-tax dollars). Timing is also a consideration: The later you wait to start taking Social Security retirement benefits the more money you will receive. And, the longer you let your savings and investment accounts grow, the more time they have to (hopefully) compound.
Sources of guaranteed income in retirement typically include annuity payments, Social Security benefits, or other ongoing entitlements, and defined benefit plans or pensions from your employer.
Non-guaranteed sources include any assets you have that fluctuate based on market conditions and are not guaranteed to last indefinitely or for a set period of time. These may include investment returns from stocks, bonds, and mutual funds, as well as real estate assets or rental income that could decline in value. Tax-deferred accounts for retirement, such as 401(k)s and IRAs (Individual Retirement Accounts), may or may not offer guaranteed growth depending on how they are invested.
Other sources of retirement income may include part-time employment or freelance work, an inheritance, or monetary gifts from family members. It may be hard to quantify these exact amounts for retirement planning purposes, but it is important to consider the likelihood of receiving them, nonetheless.
Money in a traditional savings account is also guaranteed in the sense that it grows at a predictable rate and the principal doesn’t go down in value unless you make a withdrawal – but it cannot provide income indefinitely the way Social Security benefits or an annuity can.
Step 2: Estimate your retirement expenses
The income you need in retirement may be very different from what you need to live on now, depending on where you choose to live, the type of lifestyle you lead, your medical expenses, and other factors. Estimating retirement expenses requires a thoughtful understanding of your lifestyle and potential costs. For retirement income planning purposes, it can also help to categorize your anticipated expenses as "discretionary" or "essential":
Essential expenses are the costs that are absolutely necessary for living such as food, shelter, healthcare, and basic transportation.
Discretionary expenses, on the other hand, are those that improve your quality of life but are not strictly necessary. Good management of discretionary lifestyle expenses – for example, by keeping to a strict annual budget for travel and vacations – can significantly impact the longevity and stability of your retirement income.
When trying to estimate retirement expenses, it’s also important to account for inflation, which can significantly erode your purchasing power over time. An online retirement calculator can help estimate the impact of inflation on your expenses but you may wish to consult with a financial professional as well.
Step 3: Come up with a spending/withdrawal plan
Managing essential versus discretionary spending and withdrawals in retirement is a balancing act. If possible, it’s a good idea to plan for your essential costs to be covered by ongoing guaranteed income sources, such as Social Security payments, pensions, or annuity income. Then, non-guaranteed and variable income sources like investment returns or part-time work can be a good way to fund discretionary expenses, which can be dialed back as needed if these income sources are diminished.
In any case, it's smart to maintain a flexible budget that allows for adjustments based on market performance and personal needs. Remember, retirement is a stage of life to enjoy, so wisely managing your spending can help ensure you have the means to pursue your passions and interests without undue financial stress.
Step 4: Review, evaluate and assess over time
Retirement can be divided into three primary stages: the early stage, middle stage, and late stage, each requiring a unique financial strategy.
The early stage of retirement is typically a period of increased activity. You may travel more, pursue new hobbies, or even start a small business. Expenses and cash flow during this phase might be higher than anticipated, so it's important to budget carefully and not spend down your assets too quickly.
The middle stage usually involves a decrease in spending as activity levels decline. However, healthcare costs may rise during this phase, so having a financial buffer for unexpected medical expenses is crucial.
The late stage of retirement often involves increased medical costs and possible long-term care expenses. It's important at this stage to have a clear understanding of your potential healthcare needs – and plan ahead by considering long-term care and similar forms of insurance.
Properly managing your expenses at each retirement stage involves careful planning, budget forecasting, and regular budget adjustments to adapt to changing circumstances. Regular consultation with a financial professional may help ensure that your retirement savings last throughout all stages.
Step 5: Adjust your plan
No amount of thoughtful planning can account for all the uncertainties in life. That’s why it’s never a bad idea to secure additional sources of funding, decrease expenses, or rebalance your portfolio in retirement to account for the unexpected. Things to consider include:
Increase income by taking on a part-time job, renting out your home or a room, and selling things you’ve accumulated over the years that you no longer need to hang on to.
Decrease expenses by downsizing your living quarters, moving to an area with a lower cost of living, or simply by reducing discretionary spending.
Rebalance your investment portfolio to reduce investment risk and volatility, which is typically done by decreasing your proportion of stocks in favor of bonds. This is the premise on which target retirement funds are based – as you near the target retirement date, the balance of the portfolio shifts to less risky investments.
Need some help figuring out how to reach your retirement goals?
These 5 steps can be the start of a solid retirement income planning strategy -- and the sense of financial security it can provide. Of course, everyone's situation is different, and circumstances change, but if you're concerned about creating ongoing guaranteed income, consider connecting with a local Guardian financial professional who can tell you more about annuities, including new types of Registered Index Linked Annuities (RILAs) like Guardian MarketPerformTM, which can provide an ongoing stream of predictable income in retirement, while offering market-based growth potential and protection from market downturns until you start taking income.. To find a Guardian financial professional near you, just fill in your zip code and click below.