Americans are anxious about retirement income planning. According to the 2019 Protected Lifetime Income Study, 40% of respondents’ biggest concern is “How much monthly income will I have?”.
The most alarming statistic is that only 1 in 5 have seriously envisioned life in retirement and that same 1 in 5 have a specific plan. Meaning 80% of Americans have no plan, have not thought about retirement income planning, and are at high risk for being unprepared for retirement. We are going to explore three specific questions for you to consider and get you started with your retirement income planning.
Do You Know What You Need?
The first step to retirement income planning is understanding where your money is going now. This step applies to people near retirement and also younger people who are still in the midst of their working years.
As you start to examine where your money’s going, you want to break it down into essentials vs. discretionary expenses.
- Essentials: Housing costs and utilities, taxes, medical expenses, and insurance and, basic living costs.
- Discretionary: Entertainment, travel, and, recreation.
Armed with this detailed information, you may find opportunities to become more efficient with your cash flow. That could mean reducing expenses and saving more. It also sets up the next big question to consider for retirement income planning.
How Will Life Look In Retirement?
As the study indicated, only 1 in 5 people has seriously envisioned what life in retirement will look like. At Pleasant Street Wealth Advisors we like to recommend our clients, have enough money to sleep comfortably at night and equally important a reason to get out of bed every day. What will your reason to carpe the diem in retirement be? More time to travel, more time to spend with family and loved ones, increased time for your hobbies?
How might that lifestyle shift impact your retirement income? The most common change we see is downsizing. Smaller homes are easier to care for. Some clients also move to another state, sometimes to be close to their loved ones. Other clients relocate for the weather or lower taxes.
Outside of downsizing, there are other considerations about how you will be spending your time. Do you plan to start a business? Perhaps you plan to golf daily? Or maybe you want to take art classes? These are essential questions to consider for retirement income planning.
What Do You Have?
The next step to retirement income planning is understanding what assets you have to create your retirement paycheck. For most people retirement income comes from a variety of sources.
Typical examples of income sources in retirement are 401k/403b, IRAs, social security, nonretirement savings, defined benefit plans, annuities, Employment income (full or part-time), rental property.
- What are the current balances in each account?
- How are those accounts invested?
- What would be a reasonable expectation for annual returns?
- What are your social security benefits and rental income?
How you receive income from these various sources can affect your tax situation. Understanding the tax implications of different withdrawal strategies is paramount. We recommend working with a trusted CPA to ensure the plan you utilize is the right one for your individual situation.
How Can I Apply These Concepts To My Situation?
The first step to any retirement income planning is understanding where your money is currently going. There are many great free budget tools such as mint.com. If you are not tracking your budget now, I recommend starting there, to better understand what retirement income you should be planning for.
As our clients approach retirement, we advise them to test out various retirement lifestyles. For example, taking extended vacations to areas you are considering relocating to. Trying out that new hobby and committing to doing it daily for a few weeks. See how that lifestyle feels and how your spending changes to accommodate it.
The last few working years and the first few years of retirement are a crucial time for retirees. During this period, you may have opportunities to utilize asset relocation strategies such as a Roth Conversion. Taking this type of action can help enhance retirement income longevity. Other strategies can create guaranteed income or improve social security benefits when they begin. I do recommend you consult with a trusted tax or financial advisor due to the technical nature of these strategies.
I hope you found some useful information in this article. Sign up for our newsletter below for the next part in our retirement income planning series. Thanks for reading!
Roadmap to Retirement – Webinar
Tuesday, March 16th, 2021 at 12 PM via Zoom