You save for years, but once you leave the workforce, how do you create a retirement income plan from your savings? The financial industry and media constantly talk about the need to save for retirement. Put money into your 401(k), contribute to your individual retirement accounts, and one day, when you are ready, those savings become income for you.
But how does that happen? Here are five simple steps to help you create an income plan for retirement:
1. Determine how much you need to spend to live a life you enjoy.
This should be one of the first questions you ask because the answer ultimately drives the rest of your decisions. How much money do you need each month to cover your essential expenses and the fun things you’d like to do in retirement?
Tracking this spending for the first few years of retirement is helpful, as expenses can run higher than expected. Be aware of fluctuations and make adjustments accordingly.
(Also, don’t forget about healthcare costs and preparing for the cost of long-term care.)
2. Make the most of income sources other than your savings.
There are tremendous benefits to smart planning. For example, choices like when to start taking Social Security can cut your retirement income or boost it. Married couples can use strategies like claiming spousal benefits to increase income substantially. (Review these three Social Security myths to avoid common pitfalls.)
If your income comes in another form, such as through rental properties, ask additional questions. (e.g., Do you need to factor in expenses for maintenance? Should you hire a property management company so that you don’t have to take phone calls from tenants while you’re on vacation?) Run through the numbers of your situation and consult an expert to help you make the right decisions.
3. Decide how much risk you are comfortable with.
Your comfort level with risk can affect how you allocate your portfolio. In retirement, people usually don’t want much risk because they’re concerned about market fluctuations. Yet, for a 30-to-40-year retirement with inflating expenses, some allocation to growth assets is helpful, if not necessary.
Your financial advisor can help you make the best choice for your situation and reassure you during volatility. One of the most important things to remember is that “trying to predict the best time to buy and sell may cause investors to realize subpar returns, reducing the likelihood of achieving long-term goals.”
4. Figure out how much income you need your savings to generate every year.
This amount is your total estimated expenses minus your Social Security, pensions, real estate income, and any other sources of income outside your savings and investments. Once you know how much you need each year, you can formulate a distribution strategy (which is another topic altogether).
5. Identify how much you want to leave to your heirs.
For some, this is a top priority. For others, they want to spend as much as possible while they can. Like most planning questions, there are no right or wrong answers. (You don’t even have to treat all of your kids equally.) If you plan to leave behind a substantial inheritance, just be aware that it might limit your income.
Create a retirement income plan with your financial advisor
Creating an income plan is an important step for your retirement years. Another key to successful planning while in retirement lies in following wise strategies. Your financial advisor understands these strategies and is a great source of information about how to handle your money in retirement. Their role is to help you prepare for the best — and the worst — of anything while you live out your financial freedom.
For help creating your retirement income plan, reach out to an advisor using the form below.
Adapted from: “Creating an Income Plan While in Retirement.” FMeX. 2021. https://abm.emaplan.com/ABM/MediaServe/MediaLink?token=199ff76ff024425ead8bdba7718a3d71