Retirement is a phase of life that many look forward to with great anticipation, but significant questions arise when thinking about retiring. Among them: Are you confident that you’ll have the income to fund a long and comfortable retirement? Do you know where those dollars of income will come from? Those are central characteristics of a properly formed retirement income plan.
At HighPoint Advisors, LLC, we work with clients in Syracuse, throughout Central New York, and many other markets on many aspects of finances, including retirement planning. Here, we discuss how to build a plan that takes retirement income into consideration.
To truly enjoy your golden years, it’s essential to have a well-thought-out plan in place that considers the timing and amounts of various sources of income. While that has always been the case, financial tools and economic conditions have continued to change over time, thus making retirement income planning a top priority for individuals. Fewer people have pensions nowadays, the Social Security System needs reform, financial markets are volatile, and inflation can erode purchasing power.
Challenges such as those are why it’s so important to plan. Waiting until you think you want to retire is not a good time to create your plan for retirement income. Rather, putting together a thoughtful roadmap that includes income planning multiple years in advance will ensure you can make the adjustments needed to meet your income goals in retirement.
What Are the Main Sources of Retirement Income?
- Social Security retirement income: A government-sponsored program that provides a steady income stream based on your work history and age at retirement. The monthly payments rise over time as the government grants cost of living adjustments in most years, meaning payments will better keep pace with inflation over time.
- Pensions: Traditional employer-sponsored pension plans provide a fixed monthly income for life based on your age, years of service, and salary history with an employer.
- Disability income insurance benefits: Payments received from a disability income insurance policy due to a qualified disability can supplement your income. Some policies will even continue benefits into the early retirement years, but most discontinue benefits at age 65.
- Annuities: These insurance products offer a guaranteed income stream in exchange for a lump-sum payment or periodic contributions. Immediate annuities provide income right away, while deferred annuities allow your money to grow before payouts begin.
- Withdrawals from invested accounts: Drawing money from investments (including IRAs, 401ks, managed accounts, etc.) either systematically each month or in lump sums as needed can supplement guaranteed income sources. Withdrawals are not guaranteed and must be reviewed as conditions change.
- Part-time work: Working for a little extra earned income in retirement – either because you need to, want to, or are just bored – can contribute to income and provide a sense of purpose.
- Business income & rental income: Continuing a business into retirement or owning rental real estate can be a reliable source of income, if managed properly.
Prioritize Your Income Sources
Now that you’re familiar with the various income sources, let’s discuss the optimal order for drawing income from different sources.
- Disability payments: Because disability income insurance is usually triggered during your working years, this is an income source some people already have coming in when considering retiring. The nature of disability insurance is to cover you during working years, and so benefit payments usually cease at a general retirement age (usually age 65). For that reason, this should not be relied upon as a long-term solution.
- Pensions: Pensions can be collected before normal Social Security retirement age in some cases, so they can be looked at as a main building block of income. There are many pension income options, so you may want to consult your advisor on the right option selection.
- Social Security income: The Social Security retirement system was designed to be the foundation of many Americans’ secure retirement. Delaying the claiming of your benefits (to a max of age 70) can permanently increase your monthly payments, making it an important consideration in your retirement income strategy. Conversely, claiming early benefits (earliest of age 62) will permanently reduce the amount you receive each month.
- Annuities: Whether immediate (pay me now) or deferred (pay me later), annuities can provide a guaranteed income for either a specific period or your entire lifetime. Although they can be complex, annuities can be a great tool to provide extra guaranteed income for expenses.
- Account Withdrawals: You’ve saved all your life, now is the time to put those accounts to work! To avoid drawing down your invested assets in retirement, most advisors advocate taking a withdrawal amount based on your invested risk tolerance. In other words, withdraw a percentage of your investment account each year that will allow your gains to replenish what you’ve taken out, over time. Contact Us for more information on this concept.
- Consider supplemental income sources: Some people don’t completely retire initially. Here are a few other sources that some individuals utilize for income in retirement.
- Part-time work: Either for the money or the benefits, there are reasons temporary work can make sense.
- Business income: Owners of a business may have a range of reasons for why continuing into retirement may make sense.
- Rental income: This mostly refers to passive rental income from real estate properties, which many property owners continue into retirement.
How to Make Your Money Last a Lifetime
Before creating your retirement income plan, you first need to assess your financial situation. It’s crucial to have a budget so you know where all your expenses are. Determine your desired lifestyle during retirement, taking into account factors like travel, healthcare, and hobbies. And, of course, you need to evaluate your income sources (mentioned above), savings, assets, and liabilities so you know what you have to work with.
Knowing what your retirement goals are, and knowing where and when your income is coming from will make it much easier to put your plan into action. It’s important to be able to account for the impact of inflation over time on your budget and your assets. Not all guaranteed income sources adjust for inflation, and invested assets can fluctuate in value over time, so don’t forget that you need to regularly review your retirement income plan. Life circumstances change, so revisit and adjust your plan as necessary to ensure it remains aligned with your goals. A set-it-and-forget-it strategy is not a smart plan.
Make Sure Your Retirement Income Plan is Complete With HighPoint Advisors, LLC
By understanding the various types of retirement income and the optimal order for drawing from these sources, you can make informed decisions about wealth management to ensure your money lasts a lifetime. Consulting with a financial advisor can also provide invaluable guidance tailored to your specific circumstances, helping you navigate the path to a comfortable and worry-free retirement.
Contact us today so we can answer your questions and help design an income plan that works for you.