Regardless of how successful you are, the transition from a steady paycheck to relying on your retirement savings can be challenging. The way you generate income in retirement—how you prioritize different sources of income and time your withdrawals—can have a big impact on your portfolio, your lifestyle, and even your legacy.
Working with a financial advisor can help you balance the different considerations to figure out a retirement income strategy that makes the most sense for you. Let’s take a look at the factors we consider.
What are your options for retirement income?
The main goal of a retirement income strategy is to generate enough money to cover your expenses. That money can come from a variety of sources, each of which have their own considerations attached.
Social Security. Social Security is intended to supplement your income in retirement, not replace it. Additionally, since this benefit is all but guaranteed, it’s important to use it strategically. Consider this: The longer you wait to start receiving benefits (up until age 70), the greater the monthly payment. Claiming Social Security earlier means smaller checks each month. Mainstream financial advice suggests waiting as long as possible to begin taking benefits to secure the biggest monthly payment possible. However, if you aren’t relying on Social Security as a primary source of income, it may make sense to start taking benefits sooner to preserve other assets. The timing of when to start taking benefits is rarely as simple as “wait as long as possible.”
Retirement accounts. These accounts were designed to help Americans finance their retirement, and they are indeed a major source of retirement income. Keep in mind: The government requires you to begin drawing down any traditional retirement accounts—required minimum distributions (RMDs)—once you reach a certain age. Those withdrawals are subject to tax. Roth accounts, on the other hand, do not come with RMDs, and withdrawals aren’t subject to federal income tax. Weighing these factors ahead of time can help you be strategic about how and when you use the funds in these accounts.
Investment income (yield vs. selling). Many investments generate (or yield) income without your having to sell the underlying investment. This comes in the form of dividends, interest, or rent. This yield may be subject to tax regardless of whether you pay it out to your bank account or leave it in your investment account. In retirement, you can stop reinvesting this income and begin collecting it, similar to a paycheck from your investment account. An advisor can tackle the logistics—from the type of income investments you use to the way they’re taxed—so that you can focus on the income stream without worrying about the details.
Deferred compensation. While not everyone has access to deferred compensation, it can be a fantastic option for retirement income for anyone who participates. With deferred compensation, you essentially elect to delay a portion of your salary, which is then paid to you in retirement. (Read more about this amazing benefit that too few people know about or use.)
Pensions. Like deferred compensation, not everyone has access to a pension plan. If you do, you’ll have to decide whether to elect ongoing payments in retirement or a lump-sum payment. To understand what kind of income you might receive from an employee pension, you’ll need to reference the plan documents to see how benefits are calculated. (Generally, this calculation is based on years of service, final salary, and a pension multiplier.) When comparing these numbers to the lump sum option, think about what you might do with a lump sum payout, and whether that might generate comparable income.
Create a sustainable withdrawal plan
With so many potential sources of retirement income—all with their own pros, cons, and considerations—figuring out the best plan for your family can start to feel like you’re putting together a puzzle. That’s where a financial advisor can step in to help.
At Quorum, we work with clients to develop a detailed financial plan specific to retirement that looks at:
· Your desired lifestyle in retirement.
· How much income you need to cover your expenses.
· Tax implications around different sources of income.
· Your goals for estate and legacy planning.
For clients still in the retirement planning stages, these factors still play a role. We may suggest things today intended to increase your options when you get to the retirement income stage. If you have questions about retirement planning, or how to transition from preparing for retirement to enjoying your retirement, contact us to discuss.
