How to Plan Your Post-Retirement Income
Every day, it’s estimated that 8,000-10,000 Americans retire and leave the workforce. But there’s a big difference between not working and not worrying.
According to a survey by the Employee Benefit Research Institute, 31% of working people are not confident they will have enough money for retirement, and only 27% of workers are “very confident” they will have enough money to live comfortably in retirement. If you are approaching retirement, there are a number of important decisions you’ll need to make regarding your financial situation.
Questions to Ask About Retirement Income
The best way to financially prepare for retirement is to ask yourself a number of important questions, including:
- What sources of income should I draw upon and when?
- How do I get the most from my pension and Social Security?
- Should I roll over my 401(k) plan?
- How should I invest to potentially increase my income?
- How can I potentially reduce my taxes?
- What can I do to ensure my health care needs are met?
- How much can I really spend?
- How do I go about setting up a regular income stream?
- How much can I leave my heirs?
While it’s always best to speak to a financial advisor on these questions, we’ve prepared some helpful information to get you started.
While working, many use their paycheck as a guide for how much to spend. But during retirement, there’s no regular paycheck from your employer — and that can make it tough to gauge how much you can comfortably spend each month. Additionally, for the most part during our working years, inflation is not that painful, because our wages go up along with our expenses. But for retirees living on fixed incomes, inflation could be or may be devastating.
Market performance and changing interest rates can certainly have a huge impact on retirees who are dependent on their investments for income. That’s why diversification of your assets can help manage market risk. While diversification does not guarantee a profit or protect you from loss, if you invest retirement assets in a diversified portfolio—a mix of different stocks and bonds—you may have a better chance for a smoother ride on your retirement journey.
Planning for Health Care
The good news: Americans are living longer, healthier lives. The bad news: This makes it even more challenging to plan out enough income to last through retirement. And, unfortunately, health care has become an increasingly large part of our spending, with annual health care spend at approximately over $3 trillion.
Medicare, the health insurance offered by the federal government, is available during retirement years beginning at age 65. Medicare Part A covers inpatient hospital expenses, while the optional Medicare Part B covers outpatient medical expenses, including many doctors’ fees. Because it is optional, Part B requires you to pay a premium for coverage. Medicare also sponsors Part C, referred to as “Medicare Advantage,” a private insurance alternative to Parts A and B. In order to enroll in Medicare Advantage, you need to have Parts A and B in place, which means paying the Part B premium. You’ll then receive all your Medicare-covered benefits through the private plan you choose, which could be an HMO, PPO or a private fee-for-service plan.
When planning your post-retirement finances, keep in mind that Medicare typically doesn’t cover routine physicals items such as eyeglasses and hearing aids, your dental care, including dentures, or foot care and items such as orthopedic shoes. It also doesn’t cover home custodial care or most long-term care costs for stays in an assisted living facility or nursing home. This means the average 65-year-old man would need about $130,000 set aside to pay for premiums and out-of-pocket prescription over their lifetime, according to the Employee Benefit Research Institute. This estimate goes up to $146,000 for women, who tend to live longer than men.
Three Sources of Income
Apart from your personal savings or investments, plus any pension or retirement savings from an employer, you will also receive monthly Social Security payments from the government when you retire. You will need to make decisions regarding all three of these income sources:
- When to start drawing Social Security Benefits
- When to begin drawing your pension and/or rolling over your 401(k) plan
- How to allocate personal investments and when to draw income
The earliest age to begin drawing Social Security is 62, or you can wait to receive full benefits when you reach your full retirement age, up to 70.
If you participated in an employer 401(k) or similar retirement plan, you’ll need to decide whether to roll your balance over to an IRA, and how best to draw income from your account.
And for the rest of your personal savings in IRAs or other investments, you’ll need to determine how to allocate your assets and how to draw retirement income from those assets.
Setting a Clear Direction for Your Retirement
Following a process when planning your retirement income is crucial to success. Here’s a 5-step process to simplify your planning:
- Assess your situation – Identify your goals and values. Think about what activities you plan to enjoy, where you plan on living, if you and your partner will retire at the same time, and if you plan on working part time to supplement your income. A good rule of thumb is that you’ll need 75-86% of your pre-retirement income to maintain your current lifestyle in retirement.
- Consider obstacles – When developing your retirement plan, don’t forget to consider inflation, unpredictable returns on investment, health care expenses, outliving your assets, and changing tax regulations.
- Evaluate strategies – Think about which of your assets you’ll likely draw your retirement income from. If you work with a financial advisor, they may use retirement planning software to help deliver a complete plan.
- Implement solutions – Once your plan is in place, step 4 is putting that plan into action with the appropriate products and services. Speak with your financial advisor to review options including investments, managed accounts, income annuity and more. Use a portion of your investments to cover your basic needs with certainty, and invest the rest to provide flexible income and a financial legacy.
- Measure success – Last but not least, you and your advisor should review your plan annually, to measure your success and make sure it continues to meet your goals.
This article is educational only and is not meant to serve as investment advice. If you would like to speak to a financial advisor, please contact the professionals at Service Financial Group.
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