As with other transitions in life, the decisions you make about retirement carry significant implications for your future. Whether you’re retiring soon or just getting started, there are questions to answer and steps to take to make sure you’re prepared for what comes next. Think of retirement income planning as your map to the future you wish to create.
There are plenty of online tools to help you get a basic idea of how much you’ll need each month in retirement in order to comfortably maintain the lifestyle you want, such as this retirement planning calculator. These tools will help you estimate your expected monthly and annual expenses and determine your potential retirement income from both anticipated and variable income sources.
While these tools are a good starting point when considering your retirement goals, they only look at the basics. An experienced financial planner will be able to help you navigate the complexities of your personal financial situation and develop an effective income strategy to prepare for your retirement.
Estimating Your Expenses in Retirement
Basic Expenses After Retiring
In order to plan your retirement effectively, you need an idea of how much you expect to spend to support the lifestyle you want without outliving your retirement savings. Most people’s basic spending won’t change significantly post-retirement for things such as housing, food, transportation, and general utilities, so the first step to figuring out how much income you will need is to look at what you make now. Review your recent tax returns to see what you’re actually bringing home after taxes, and let that be your starting point. Don’t forget to take into account any outstanding debts you may still have once you retire.
Retirement Age and Medical Expenses
There are some expenses that you should expect to change in retirement, and health insurance and medical costs definitely fall into that category. Most Americans under the age of 65 are covered through an employer, and of those retiring at age 65 or later, almost all will be eligible for Medicare, significantly reducing their health insurance costs.
However, if you plan on retiring before the age of 65, you need to consider the annual cost of health coverage until you are eligible for Medicare. You do have a few options, like the State Health Insurance Marketplace, COBRA coverage, or your spouse’s health plan (if applicable), but you should expect your healthcare costs to jump from what they were until you reach 65. Private health insurance can run from $1,500 to $2,000 a month for married couples and $3,000 to $4,000 for family coverage.
Defining Your Retirement Goals
Now that you’ve got a pretty good idea of what your basic expenses will be, it’s time to define your retirement goals. When you imagine your retirement, how does it look? What exactly do you want to accomplish? Do you want to move to a different state or maybe purchase a vacation home? What type of inheritance do you wish to leave to your heirs? Are you planning on donating your time or money to a charitable organization? What type of travel budget should you expect? Do you have a bucket list?
Figure out how much these things will cost and when you want to do them, and then work with a financial professional to determine how much you need to save and what rate of return you need to hit in order to fund each goal.
Anticipating Your Longevity
Once you’ve estimated your expenses, you’ll also need to consider how long your retirement may last. A study by the Social Security Administration reports that a 65-year old American can expect to live another 19-21 years, perhaps longer. It’s important to develop a long-term retirement income plan that extends past your life expectancy, so you don’t outlive your savings.
Determining Your Retirement Income Sources
How can you determine what your monthly income will be once you’re no longer earning a paycheck from employment? First you’ll need to identify your income sources and assets. You may have personal savings, investments, a pension fund, and perhaps an inheritance, real estate, or trust.
Guaranteed Income Sources
Guaranteed income sources are structured to last your lifetime, and provide an expected amount of monthly income during retirement.
- Social Security
- Pension Plan (sometimes called a defined benefit plan)
- An Annuity (can be a retail annuity or from within a retirement plan)
Variable Income Sources
Variable income sources can fluctuate with the market or for other reasons, and are not specifically structured to last your lifetime. While investment diversification is always important, you should also consider the implications of tax diversification. Incorporating this methodology can give you more options and flexibility in retirement to better control the amount of taxable income you are reporting each year.
Tax-Free
- Personal Savings/Cash on-hand
- Non-Retirement Investment Accounts (stocks, bonds, mutual funds)
- Roth IRAs
Taxable
- Employer-sponsored Plans (401(k), 403(b), 457, etc.)
- IRAs (Traditional, Rollover, SEP, SIMPLE)
- Rental Income
- Income from Part-time Job
Deciding When You Have Enough Money to Retire
Once you’ve mapped out your budget and income sources, you will have a better idea of any gaps you may face when planning your retirement. Gather statements for all of your accounts to ensure you have all the information you need to review with a qualified financial advisor who will help you create a retirement income strategy that fits your specific needs and can answer any questions you have about retirement planning. The questions we hear most often are:
- How much do I need to have saved in order to retire comfortably?
- What rate of return do I need to earn on my investments to generate income for life?
- Which accounts should I draw from first?
- When should I file for Social Security?
- Will I run out of money if I retire now?
If yes, what can I be doing each year to improve the picture?
An experienced wealth advisor understands the many variables that can affect your retirement plan, and they will provide you with solutions that truly take into consideration every avenue of your finances. When we work with clients transitioning into retirement, key factors our team aims to address are estimating expenses after retirement, determining retirement income sources, developing withdrawal strategies, eliminating or reducing income and estate tax burdens, examining current tax laws, and any insurance implications they may face.
