You’ve spent your entire working life saving and investing in tax-advantaged retirement accounts like 401(k)s and IRAs.
As retirement draws nearer, however, it is important to expand your focus beyond accumulating assets, to start planning how you will generate annual income from those assets. Let’s take a look at three important planning considerations for an effective retirement income strategy.
What are the Three A’s?
It can be helpful to think about planning for your income needs in retirement as three distinct phases—early retirement, mid-retirement, and late retirement. Early on, your good health and newfound freedom will probably require considerably more income to support frequent travel, entertainment, and active hobbies. Over time your annual income needs will tend to slowly diminish—as your amount of travel decreases and you stay closer to home. But in the latter stages of retirement, your income needs will often begin to rise again as out-of-pocket medical expenses begin to mount.
1. Anticipate the Future
To begin honing in on your income requirements, you’ll need to begin answering some important questions that you’ve likely thought about, but maybe haven’t yet definitively answered:
- What exactly will retirement look like to you? Do you envision a ‘second act career’ where you’ll pursue a passion, or do you see yourself relaxing at a beach house? What sort of travel plans do you have?
- When do you plan on retiring? And how long do you expect to be retired based on your family history of longevity and your overall health?
- How much income will you need to fund your retirement lifestyle? And would you be willing to delay retiring by a couple of years if it meant achieving all your goals?
- What sources of guaranteed income (e.g., Social Security, pension, and/or an annuity) can you count on to cover your essential expenses? And how much will you need to draw from your retirement savings to meet your other wants and wishes?
- If you own a business, will you sell it when you retire? Or will you continue to receive income from it?
- How important is it to you to pass on a financial legacy to your heirs or charity? It’s important to engage in these types of conversations well in advance of your retirement so that together we can identify any obstacles and make the necessary adjustments to your savings strategy or spending plan to provide a realistic framework for a successful outcome.
Maybe you’ll want to consider foregoing a few luxury expenditures during your final working years in order to take advantage of allowable ‘catch-up contributions’ to your 401(k) and IRA. Or perhaps you’ll want to explore purchasing an annuity that provides a guaranteed annual income amount for as long as you live, or updating your investment strategy.
2. Activate Your Plan
Once the office ‘send-off’ party is over, the reality of retirement sets in. For some, going from sixty to zero overnight is a dream come true. For others, though, it can be a difficult adjustment. The desire to remain actively engaged (whether through consulting, mentoring, or pursuing an avocation) is too strong to completely walk away.
Not only can this allow for a gradual easing into retirement, the extra income can help to dramatically strengthen your retirement income plan. Postponing the need to start drawing down your savings by even a few years, allows retirement account assets to continue growing tax-deferred. And having that extra income may also afford you an opportunity to delay claiming your Social Security benefits— which will provide you with a higher monthly benefit amount when you eventually do start receiving benefits.
Try to avoid the common mistake many new retirees make of getting too conservative with their investments. The conventional wisdom of moving from stocks to bonds as retirement draws near came about at a time when retirements typically only lasted 10 or 15 years. But today, a healthy retiree can expect to enjoy a 30-year retirement— more than enough time to keep assets that you won’t need until later in retirement invested for growth. This is especially true given the current historically low yields available through U.S. government and corporate bonds.
3. Acclimate and Adjust
Keep in mind that it takes time to get used to any new situation. Retirement might feel a bit awkward at first as you get your bearings and find your sense of purpose and belonging.
There are no hard and fast rules when it comes to determining what percentage of your savings you can afford to spend each year in retirement. The age at which you retire, your willingness to accept investment risk, and your desire to leave an inheritance will all affect the amount. As a general rule of thumb, consider spending no more than 4% of your savings each year1 .
You may have retirement assets spread across taxable accounts (savings and investment), tax-deferred accounts like your 401(k), traditional IRAs, and tax-free Roth IRAs, and we can help you determine which accounts you should withdraw from first. If leaving a sizable inheritance isn’t a priority, you’ll probably want to spend down your taxable accounts, followed by any tax-free savings, and lastly your tax-deferred accounts. This will allow you to keep your tax-deferred accounts growing for you as long as possible before you have to pay taxes on them.
A well thought out plan is a terrific start, but you also want to be ready to alter your course if life throws you a curveball. Planning is a continuous process that needs to evolve as your life and circumstances change. Unexpected medical costs, caring for an aging parent, an adult child returning to the nest, or divorce/widowhood are just some of the unexpected events that can necessitate revisiting your retirement income plan.
What are you waiting for?
Even if your retirement is still a decade or more away, the sooner you begin thinking about your desired lifestyle and income needs, the more options you’ll have available to you and the easier it will be to reach your goals.
Working with Janney
Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.
When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences. Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
About the author
Vice President, Director of Insured Solutions ConsultingRead more from Peter A. Longo
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