As retirement draws nearer, however, it is important to expand your focus beyond accumulating assets, and start planning how you will generate annual income from those assets. Let’s 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 diminish slowly—as your travel decreases and you stay closer to home. But in the latter stages of retirement, your income needs will often 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 start 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? 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 with your Financial Advisor well in advance of your retirement so that together you 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 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 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 walk away completely.

Not only can this allow for a gradual easing into retirement, but the extra income can help to strengthen your retirement income plan dramatically. Postponing the need to start drawing down your savings by even a few years, allows retirement account assets to continue growing tax-deferred. 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.

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 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 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 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 some of the unforeseen 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 and the easier it will be to reach your goals.