A key part of planning for a successful retirement is maximizing your retirement income and ensuring it will be available throughout the remainder of your life. This is known as Retirement Income Planning.
For most people, retirement is the inflection point at which you go from an accumulation of assets during your working career to a drawdown of those assets throughout your post-working years.
This drawdown of assets should be carefully planned to maximize its longevity and reduce taxes and downside risk. To create an ideal retirement income plan according to your unique situation, we review all of your assets and potential sources of income, discuss your income needs and goals, and determine a plan for drawing down those assets over time in a way that avoids unnecessary risk and tax liability.
Common Retirement Income Planning Mistakes
In helping clients over the past 20 years to build successful retirement income plans, we’ve come across many common mistakes. Here are the top 5.
1. Not Having a Formal, Written Retirement Plan
As the old adage goes, if you fail to plan, you have planned to fail. Many future retirees will spend more time planning their next vacation than they will on planning for their retirement. It is essential for every individual or couple approaching retirement, to develop a plan including but not limited to the following:
When are you expecting to retire?
What are your retirement goals?
What is a reasonable amount of money to retire with, for you and your retirement goals?
How long do you think your retirement will last?
What will your estimated living expenses be at retirement?
What will your estimated living expenses be 10 years into retirement? 20 years into retirement?
Where will the money come from?
Through this process you will arrive at the responses that will begin to lay the foundation for what will hopefully be a long and prosperous retirement.
2. Not Being Strategic About Social Security
It is extremely important to fully understand the myriad of claiming options available to you and your spouse. Some of the most common mistakes made as a result of not being aware of these options would be:
Filing earlier than necessary
Not coordinating benefits with a spouse
Forgetting to factor in survivor benefits
Properly optimizing Social Security benefits could possibly save a typical individual and/or their spouse many thousands of dollars over the duration of their retirement.
3. Retiring Too Early
Almost everyone, at some point, has dreamed of retiring early and spending the rest of their time as they see fit. Unfortunately the reality of early retirement, for most people, remains just that, a dream.
Early retirement requires a substantial nest egg that most people simply do not have. An early retirement, combined with continued increases in life expectancy, may put most retirees at greater risk of running out of funds. Most people would be surprised if they saw the amount of increase in retirement independence working only a few extra years could provide.
This additional independence, associated with retiring at the traditional retirement age, would stem from a reduction of your retirement duration, an increase in Social Security and other defined income streams, and a potential increase in the amount of financial assets that could accrue.
If, however, early retirement is still a goal that you would like to realize, It would be absolutely critical to create a Retirement Income Plan that addresses the additional funding necessary to cover the longer duration of your retirement.
4. Not Having a Plan to Address Potential Healthcare & Long Term Care Expenses
This is an area that is often overlooked in the retirement planning process. It is quite common for retirees to assume that Medicare will cover every expense, but that is simply not the case. Ignoring these potential future expenses and not developing a contingency plan to pay for them could derail a retirement plan and leave you and/or your spouse financially vulnerable in your later years.
5. Not Adjusting the Level of Risk in Your Retirement Portfolio
As people approach retirement, they will start to transition from the asset accumulation phase to the distribution phase. Your time frame gets shorter in the distribution phase, and it is highly likely you will need to start taking income and distributions from your retirement accounts.
Your new time frame and portfolio income needs will potentially demand a lower portfolio risk level that should increase the odds of maintaining a relatively stable account balance. A stable account balance with some growth will allow a retiree to potentially use their assets for the entire length of their retirement.
Frequently Asked Questions About Retirement Income Planning
How Much Will I Need To Retire?
Actually, it depends. There is, unfortunately, no one size fits all magical retirement amount that will work for everyone. Every potential retiree will need to develop & customize a plan that will address their particular situation. This process, if done properly, will help you determine the approximate amount you would need at the age you would prefer to retire.
The first step in determining that amount, would be to identify all the monthly expenses you would anticipate incurring, in order to maintain your desired lifestyle for the projected number of years you will spend in retirement.
The second step, would be to identify all of the various income streams that would be available to you at Retirement. This would include Guaranteed Lifetime Income Sources such as Social Security, Pensions, Annuities along with income you will derive from projected Investment and Savings account balances.
The third and final step, would involve incorporating expected inflation, taxes, and pre & post retirement investment returns into the plan. At that point, you would then be in a position to arrive at the approximate amount of assets you will need at your desired retirement age.
When Do Most People Retire?
According to the Employee Benefit Research Institute (EBRI), the median retirement age is 62. Anyone can retire whenever they have the resources to do so, but unforeseen events, such as disability and various employment-related situations, often force the issue.
When Should I Take Social Security?
The full Social Security Benefit is available to those who file their claim at Full Retirement Age (FRA), currently age 66 to 67 depending on the claimants year of birth.
You can, however, claim your benefits at a discount to your full benefit anytime between the age of 62 and your FRA. The discount is calculated using a formula that factors in your specific age to the month on the date you file a claim. You can also defer past FRA up to and including age 70. You will receive a premium to your FRA benefit, which will also be calculated based on your specific age when you file. There is no benefit to deferring past age 70.
If you claim your benefit at Full Retirement Age or later, and are no longer employed, it will remain the same, with the exception of Cost of Living Adjustments, for the rest of your life. It is also important to note, that survivor benefits will be based off of your benefit. The higher your benefit, potentially the higher the survivor benefit.
Some of the factors that people weigh prior to their claiming decision would be claimant’s health, survivor concerns, life expectancy, other income, financial assets, and employment status & taxes, to name a few.
As you can see, there are a number of factors that need to be considered prior to making a decision to claim your Social Security benefits. Most of these factors tend to be personal and need to be viewed in relation to other resources that are available. A good Retirement Income Plan should be able to assist you in integrating this decision with other variables that are unique to your situation and potentially increase the odds of making an optimal decision.
Will I Run Out of Money in Retirement?
Life offers no guarantees and that adage clearly applies in the world of Retirement Income Planning.
Whether you run out of funds or not, will be largely driven by your expectations and assumptions. Unrealistic expectations and assumptions during retirement could pose problems during your later years and could quite possibly lead to a meaningful reduction in the standard of living you have been accustomed to.
Lifestyle expectations ie., funds allocated to discretionary expenses well above reason, and financial assumptions regarding rates of investment returns, taxes and inflation that are much rosier than what should be, are all retirement pit falls that need to be addressed in the Retirement Income Plan. The more realistic these assumptions are, the greater likelihood the Plan will intersect with reality and the greater the likelihood you will not exhaust your funds.
Should I Have an Annuity?
An Annuity, at its core, is a sum of money paid to someone each year, typically for the rest of their life, and/or the life of their spouse. This is accomplished by making one lump sum payment or a series of payments over a period of time to an Insurance Carrier. In return, the Insurance Carrier assumes the risk of initiating these annual payments, either immediately or at some future interval.
There is currently, in the Marketplace, a wide variety of annuities differing in risk, time frame, expenses & payment options. Despite the many blanket proclamations made to the masses, by, seemingly well intentioned proponents and detractors alike, it would be virtually impossible to determine the individual suitability and potential need for this product, without an in depth knowledge of an individual or couples specific situation. It would need to be analyzed within the context of a Formal Written Retirement Income Plan.
What Will I Do in Retirement?
There is a segment of the retiree universe that will have no desire to be active in any way, shape, or form. They feel that they have worked their entire adult life, and in their retirement years would prefer to live a life of leisure. If you fall into this segment, there is no need to apologize or feel guilty, you have earned it, enjoy.
The rest of the crowd, however, will probably maintain an activity level running the gamut from being active enough simply to break up the week, all the way to retirees with a tighter schedule than they maintained in their working years. Wherever you fit on this spectrum, from somewhat active to extremely active, what you choose to do will largely be determined by your imagination, interests and energy level, and the beauty is you will be entirely in control of your destiny.
Based on feedback from numerous retirees I have included a sampling of the activities they are currently enjoying:
1.- Travel (Taking a Dream Cruise, Seeing the US in an RV, A traditional vacation deferred for too long) 2.- Hobbies (Become a Master Gardener, Collecting Antiques, Wine Making) 3.- Volunteer (Museum, Senior Center, Hospice, Mentoring) 4.- Sports (Golf, Tennis, Bowling, Fishing, Pickleball, Water Aerobics) 5.- Fitness & Health (Join a Walking Group, Train for a Marathon, Yoga, Meditation) 6.- Education (Learn a New Language, Learn to Play a Musical Instrument, Broaden Cooking Skills)
Whatever you decide on, give it your best and enjoy.
Should I Relocate in Retirement?
Although the majority of people will retire in place, many people will decide to permanently relocate usually citing the following reasons: 1.- Leaving a higher cost of living state for a lower cost state. 2.- Tax reduction (Primarily Income & Property taxes). 3.- Choosing a state that does not tax Social Security. 4.- Milder climate (Northeast & Midwest to Southeast and/or Southwest) 5.-Greater proximity to recreational activities (Golf, Tennis, Boating etc.)
If you are contemplating this path, for any or all of the reasons referenced above, you may want to defer any final decision until you have fully thought out and responded to the following questions:
Are you currently close to family? Are they close to you? Will you be leaving behind a solid network of friends and acquaintances? Do you believe in the adage “There’s no place like home”?
If you have responded No to all or most of these questions, relocating to another part of the country might be a relative non event and provide you with a fresh start while you experience many of the benefits previously cited.
If you responded Yes to any or all of the questions, you may want to give some serious thought prior to a relocation decision, and determine if you may experience some emotional regret.
If you do give this decision the proper amount of thought and you ultimately decide to relocate, you may want to consider a dry run for about a year or so. This would just involve deferring any major decisions like purchasing a new home until you are firmly convinced you have made the right move. This would provide a greater degree of flexibility to adjust your plans if necessary.
Will I Be Able to Leave a Legacy?
Leaving a financial legacy to loved ones is a laudable objective shared by many retirees. Whether you will be in a position to do this or not will be determined by the results of your Retirement Income Plan. After completion of this plan an Individual or couple will find themselves in one of the following four scenarios:
1.- Your guaranteed income sources (Social Security, Private Pension etc.) will likely meet all your needs. 2.- In addition to your guaranteed income you will probably need to earmark some % of your financial assets. 3.- You will possibly need to earmark all of your financial assets. 4.- You will need, at some point, to possibly access non financial assets (Primary Residence, Vacation Home etc.).
As you can see with all four of these scenarios, they require varying degrees of assets earmarked specifically for retirement. Scenario one provides the greatest likelihood of leaving a legacy and scenario four provides the least. At the end the day, there are no guarantees, with variables such as retirement length, portfolio return, taxes and inflation, determining your outcome.
Legacy assets typically left to loved ones generally include Personal and Vacation Homes, Investment Accounts, Savings Accounts, IRAs, and Life Insurance proceeds. Depending on your circumstances, some of these assets you may want to pass along while you are alive.
What Can Be Done to Address Healthcare & Long Term Care Costs?
Sudden illnesses & chronic health conditions will inevitably afflict even the healthiest of retirees. It is extremely important for each retiree, when they reach 65, to apply for Medicare. Medicare is the Federal Government’s health insurance program and is available to everyone at age 65. Medicare will cover many, but not all, health care costs.
It is for this reason, many people will either purchase Medicare Supplemental Insurance, more widely known as “Medigap”, or a Medicare Advantage Plan. These plans are both accessed through private Insurance Carriers.
There are advantages and disadvantages to each of these options and you should consult with someone that has some expertise with these options prior to your decision.
The cost of long term care, unfortunately, has become quite expensive and is a potential risk for every retiree. You need to address this risk by either purchasing a Long Term Care Policy, setting aside cash reserves, or a combination of the two. If you wait too long to purchase coverage, 65 or older, you may find the cost to be prohibitive.
Whichever method you choose, it needs to be addressed in the Retirement Income Plan and the amount you quantify to address this risk, should be set aside for either a cash reserve or to pay Insurance Premiums.
When Do I Need to Start Taking Required Minimum Distributions (RMDs) from my IRA?
Your first RMD, from your Traditional IRA, must be taken by 4/1 of the year after you turn 72. Each subsequent RMD must be taken by 12/31 of each year. If you do not take your RMD, in any given year, you will be subject to a potential penalty of 50% of the RMD amount.
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If you need retirement income planning help and want to speak with a trusted financial advisor, please Contact us. We’ll coordinate a meeting to see if we’re good fit in helping you build a retirement income plan that matches your unique needs and goals.