Most people consider contributing to their 401(k) plan all the “income planning” they need, but true income planning is an essential part of retirement, although it is often set aside due to other life priorities. Planning for your sustainable income in retirement requires much more attention than it receives, and should be addressed early in your career. Typically, retirees are told they should plan to retire with at least 60-70% of their pre-retirement income; however most retirees know they really need about 100% of their pre-retirement income to stay comfortable.
There are several different sources to consider when developing a retirement plan:
Social Security is the most common source of lifetime income; however, under a normal situation, it can’t be drawn on until age 62 and that amount will be at a reduced rate for the rest of your life.
The longer you can hold off taking Social Security retirement income will ensure larger amounts in the long run. For example, if you have an entitlement of $1000 per month at the age of 62 but wait until your full retirement age of 66 you would be entitled to $1400 per month. That is an increase of 40%; however, if you can withstand until age 70, your check each month would be $1900 which is a 90% increase.
The Social Security program is the topic of many discussions in terms of spending cuts; this leads many people to start withdrawing their benefits as soon as possible. It is important to calculate where your break-even point would be on those three options to ensure you are receiving enough income for the rest of your life.
Defined Benefit Pensions
Some companies offer a defined benefit pension plan that provides retirement income. This income is based upon your pre-retirement income and anything else you contribute to the plan and is designed to last for the life of the employee.
There are several options to choose from when selecting this type of retirement plan that may convert your retirement income accounts into lifetime income streams. More than likely, your retirement income planning will include converting your assets into income streams.
If you are the age of 65 or older, have served the military during wartime, and were discharged honorably, you qualify for a war veterans pension benefit; you should check this benefit out and see how much of the VA pension belongs to you.
401(k)’s and IRA’s
Today there are 401(k)’s and IRA’s that generally give tax-deferred benefits which enhance your monthly contributions. Additionally, a ROTH IRA offers the tax benefit of paying taxes upfront, thereby relinquishing tax liability at the time of withdrawal. The best way to make your 401(k) or IRA last the length of your retirement of approximately 33 years is to plan on withdrawing no more than 4% per year.
Investments and Savings
It is generally a good idea to keep some of your savings outside of tax-deferred retirement accounts. There is more flexibility in products such as CD’s, mutual funds, and money markets due to life being unpredictable. These accounts are being converted to income streams more often as of late to cover essential living expenses.
The number one investment retirees have is their home; this accounts for nearly half of their net worth. In order to use your home’s equity to generate income, it must be considered a source of income rather than an asset to pass down to heirs.
There is a program available as of late referred to as a ‘reverse mortgage’ where your home, as an asset, is converted into an income stream. Contact one of our financial planners to learn more about income planning and how you can better prepare yourself to enjoy life in retirement.