Unlocking Tomorrow: Mastering Retirement Income Planning Today
by Gabriel Lewit
Planning for retirement is about more than just accumulating assets during your working years. It’s about crafting a comprehensive strategy to enjoy a comfortable lifestyle in your golden years, experiencing financial security late in life, and leaving a lasting legacy for future generations.
A major component of retirement planning is tied to the income you will need to live the life you deserve. While most people are focused on saving for retirement during working years, determining exactly how much you will need for living expenses is equally important in the overall retirement planning process.
Planning for tomorrow has never been more crucial in today’s ever-evolving financial environment. With increased life spans due to technology and medical research, there’s a good possibility that many spouses will retire at 65 and live to be 100 or more. A lot can happen in 35 years.
Ask yourself: Do you have a retirement income plan to support both spouses during 35 years of increasing uncertainty?
In our blog, we’ll discuss some important considerations associated with retirement income planning.
Read our latest comprehensive guide: Mapping Your Journey: Four Pillars of Smart Retirement Planning
Understanding Retirement Income Needs
Retirement marks a significant shift in your life, not only in your daily routine but also in your financial disciplines. While many day-to-day expenses, such as commuting, professional clothing, or work lunches, will decline or disappear upon retirement, new expenses may arise. That can be good or bad news if you are unprepared for it.
The offset to your work-related expenses is associated with how you want to live once you retire. You may travel more, start a new hobby, play golf at your country club, buy a second home, or spend increasing amounts of time with your family. You may also change where you live (downsizing, relocating, lower taxes, reduced cost of living) once you retire.
These are all considerations that should be included as part of your retirement income planning process.
It’s also critical for you to be realistic about your retirement income needs. Now is not the time to live beyond your means. Setting realistic retirement income planning budgets is something that a retirement planning CERTIFIED FINANCIAL PLANNER™ professional can assist you with.
Factors Affecting Retirement Expenses
Several economic and financial factors can impact the expected and unexpected expenses you’ll incur during 35 years of retirement. For example:
- Inflation: Over time, the cost of living will tend to rise. This increase erodes the purchasing power of your savings. Rising healthcare expenses may be at the top of the list. What seems adequate today may not be in a few short years, based on the rate of inflation and your number of retirement years.
- Medical Care: As we age, medical expenses often increase. Whether routine care, medications, or unexpected health procedures, it’s prudent to account for these rising costs in your expense plan.
- Lifestyle Choices: Retirement is a chance to live your dreams. But whether you envision a quiet life in a countryside home or traveling the globe, your choices will significantly impact your expenses.
Understanding Your Retirement Income Sources
There are many possible retirement income sources that you can include as part of your planning process. Understanding the ins and outs of each income source can be the key to a comfortable lifestyle for all your retirement years.
Let’s start with the Traditional IRA and 401(k)/403(b) plans. These retirement accounts are considered tax-deferred, meaning contributions to the plans are tax deductible, gains and income accumulate tax-free, and distributions are taxable. In retirement, it’s wise to take distributions from these accounts in years where you expect to be in a lower tax bracket, thereby managing the tax impact more prudently.
Roth IRA offers a flip side. Contributions are after-tax dollars, gains, and income in the accounts accumulate tax-free, and distributions are tax-free. If you anticipate being in a higher tax bracket in retirement, consider a Roth IRA.
Non-retirement savings accounts provide flexibility when other accounts are currently maxed out, and you can save even more. But remember, they could incur capital gains taxes on appreciated assets, and dividends and interest are taxable.
Social Security benefits, a mainstay for many retirees, might be taxable based on your combined income. To minimize taxes, consider the timing of your Social Security benefits in conjunction with your other income sources.
Passive income from investments, like rental properties, can provide steady cash flow. However, understand the tax implications of these income sources and consider tax strategies like maximizing depreciation to offset income.
Lastly, annuities can guarantee income for life, but some may also have tax nuances. For instance, while annuity income can be consistent, a portion of the payout might be subject to tax.
Having a Drawdown Strategy
How you distribute your savings throughout your retirement years is an important element of planning. A drawdown or withdrawal strategy is a thoughtful, structured approach to taking retirement income distributions while minimizing taxes.
A drawdown strategy is also about preserving your wealth during market downturns and ensuring you don’t outlive your assets late in life. Markets are unpredictable, and during a prolonged downturn, withdrawing too aggressively can significantly erode your account balances and future income. Imagine the potential pitfalls of distributing funds when your portfolio value is down; you’d be selling assets at a discount, locking in the losses, and having fewer dollars for your future use.
A well-crafted drawdown strategy considers this, helping you reduce the risk of depleting your assets prematurely.
As we age, our financial needs and personal circumstances evolve. As noted, healthcare costs may rise faster than inflation, or you may need assisted living, skilled nursing, or memory care later in life. A flexible drawdown strategy allows you to adapt, ensuring you have the funds available when you and your spouse need them.
Incorporating estate planning can further enhance your financial well-being. You can optimize your tax situation by effectively timing account withdrawals which can increase the amount of money you have available later in life.
If passing on a legacy is important to you, a sound drawdown approach will be instrumental.
Partner with a Retirement Income Planning Professional
Navigating the complexities of retirement income planning can be daunting. It’s not just about saving; it’s about ensuring a stable income flow in your golden years.
Partnering with an experienced retirement income planning specialist is crucial. This professional should have the expertise to craft complex strategies tailored to your needs for a comfortable lifestyle with financial security.
Equally vital is making sure your financial advisor is a fiduciary. Fiduciaries are legally bound to always act in your best interest, reducing the risk of conflicts of interest. This commitment to prioritize your financial well-being can make all the difference, providing you with additional peace of mind about your financial future.
Every new client relationship at SGL Financial starts with a customized 4-Pillar Plan. You should first develop a plan before investing. Our 4-Pillar Plan helps to ensure that you get custom-tailored advice based on your circumstances, concerns, goals, and tolerance for risk.
Your financial future is in your hands; let’s work together to craft a retirement plan that is as unique as you are.