Create a Plan to Manage Income in Retirement

financially savvy kids

By K. Bridget Schneider, CFP®, CRPC®

income in retirement

The shift from saving for retirement to taking income in retirement can be a tricky proposition.  You may feel comfortable enough to retire when your retirement savings reaches a certain level.  However, that may not be the right focus.  Instead, perhaps you should be asking, “Will I have enough reliable income to retire?”  Consider taking these steps to create a plan to manage your income in retirement. 

Consider Your Income Allocation Strategy

Asset allocation is an investment strategy that aims to balance risk and reward by allocating a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.  When you are taking income from your retirement savings, you should also consider your income allocation.  The idea is to create an income allocation that will continue to pay you rather than collapse when the market goes haywire and the value of your retirement savings drops. 

Maximize Social Security Income

Some people want to start drawing their Social Security as soon as they turn 62, whether they have retired or not.  They usually justify this decision a couple of ways.  One argument is that they want to get their share before Social Security runs out of money.  Another argument is that they must live beyond 82 years of age before they would have collected more benefits by waiting until their full retirement age to collect. 

Unfortunately, neither of these arguments looks at the entire picture.  As an example, if you are still working and start benefits early, your Social Security benefit may be further reduced for earnings over a certain amount.  In addition, depending on your income levels, part of your Social Security may be included in taxable income.  Does it make sense for you to start taking a reduced benefit before full retirement age only to give up part of it?

None of us knows how long we will live, but the difference in lifetime value between starting your reduced Social Security at age 62 and delaying until your full retirement age or later can be hundreds of thousands of dollars.  Since Social Security offers you the opportunity for monthly income for as long as you live, if you can wait to start it, you may enjoy a higher standard of living.

Minimize Income Taxes

Depending on the type, each of your financial accounts may be taxed differently.  You need to be strategic with how and when you take withdrawals from each one.  Here are a few points to consider:

  • Manage withdrawals from your IRA rather than simply taking the IRS-mandated required minimum distributions.
  • Consider a Roth conversion to control when and how much you are taxed.
  • Be aware of how much you withdraw annually and how the amount impacts your tax bracket.
  • Capital gains and dividends will receive favorable tax treatment in your non-qualified accounts but are taxed as ordinary income when you make withdrawals from a traditional IRA.

Taxes can be complicated and what works well for you may be different from what is best for someone else.  Tax efficiency is one of the areas where working with a financial advisor may be valuable.  You should look for someone familiar with retirement drawdown strategies.

Consider Additional Lifetime Income Opportunities

It is a common practice for financial advisors to recommend that you limit your annual withdrawals from savings and other retirement sources to roughly four percent of your account balance. While the overall objective is to manage withdrawals so you don’t outlive your money, sequence of returns can cause this strategy to fail. 

To guard against outliving your money, you may want to consider placing some of your retirement savings into an annuity.  The goal is for income from the annuity to cover your essential expenses in retirement when Social Security and pension (if you have one) are not enough.  Depending upon how they are structured, annuity payments can be set up to last for your lifetime.  This strategy can alleviate worries about loss of income from a lower value on your investments due to a declining market.

Summary

The goal for managing income in retirement is to increase the amount of after-tax income and provide a reliable, increasing income stream.  If you need help with investment strategy, calculating your need for income, or have questions about what types of annuities may work for your situation, it may be helpful to speak with a Certified Financial Planner™ professional.  Be sure to visit our website today or call us at 217-605-8130. Our mission is to help you make more informed decisions to better your financial position and reduce your financial stress.  

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice.  The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Traditional IRA account owners should consider the tax ramifications, age, and income restrictions regarding executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

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