Congratulations! You’ve worked for decades to prepare for retirement and now you’re there, or almost there, ready to start what can be the most enjoyable phase of your life. Very likely, you’ve got plans to travel, see family and friends and maybe even revisit hobbies you’ve neglected for decades.
However, as you are most likely aware, you must also make plans related to your money. Specifically, you want to be sure you have enough retirement income to last you for the rest of your life.
If you’re reading this, odds are good that you’ve done some saving or investing with an eye on retirement. You might even be quite adept at putting together a portfolio that’s well diversified and has performed well, which is exactly what you got you here in the first place.
Now, as you look at retirement, you are faced with some new questions. When you retire and you need to start accessing and spending that money, do you know what to do? Do you know how much you need in order to retire? Trust me, no one wants to make a mistake when it comes to something as crucial as their retirement income.
How do you know how much you can safely spend, considering that you might live for another two, three or even four decades? Things get a little more complicated at that point, but they are not impossible by any means.
Let us just say up front: you are not alone. Only 32% of retirees say they are very confident in their ability to live comfortably throughout retirement.[i] It’s clear that many retirees have the same kinds of questions you have – just as they want to enjoy their retirement time rather than feeling anxious about what they should or shouldn’t spend.
No one wants to have a retirement that requires such frugality that any enjoyment is completely drained. At the same time, no one wants to deplete their nest egg too quickly either.
We’ve put together this retirement income guide to help you understand and manage your financial picture so that you can enjoy your retirement for as long as possible. Use these nine tips to find your footing as you consider the right amount of income for you.
Establish a budget
Playing it by ear, with a general idea of your monthly income and expenses, does not constitute a budget, which is essential for sound financial planning at any point in life -- but particularly during retirement. If you don’t know where you are at financially, it is impossible to decide how you can stretch and allocate your income.
A budget is a plan that acts as your retirement income roadmap. Set one up using any one of the many tools available online or set up a consultation with a financial planner. You should review and adjust any budget regularly so that it reflects what’s truly happening along with what needs to happen; simply having it is an essential first step in controlling your retirement income.
We assure you that it’s never too late (or too early!) to create a budget. If you have one, you’re less likely to run out of money during your retirement years. It will help you understand what you need to do to feel financially secure during retirement.
You Might Need to Spend Less
This ties right into having a budget and is not always as easy as it sounds. Many retirees continue to spend at the levels they did when they were fully employed. For most people, this is not a sustainable approach.
You can save money almost daily by taking advantage of retiree discounts for food, entertainment, lodging and the like. You can save more by having just one automobile, using public transportation and booking bargain travel – after all, you will be retired, so you can travel on off days.
Ideally, you won’t carry any debt into retirement, so if you are within 10 or more years of retiring, you might want to focus on this goal now. However, even if you are diligent about paying down debt, eliminating it entirely simply may not be possible.
In that case, you may wish to examine refinancing loan payments or mortgages. Remember to look closely at all fees associated with refinancing to be sure you are indeed saving money.
Take a Part-Time Job
We know we’re talking about not working here, but your budget may reveal that you simply just need more retirement income. Despite yearning to retire, you may need to take on a part-time job to boost or keep your nest egg at a comfortable level.
Earning a few thousand dollars annually can make a significant difference in your retirement portfolio. A part-time job can also create the social opportunities often associated with a job, which in turn helps your overall health.
If you do decide to take on part-time work, consider being a consultant in your field or exploring a job linked to one of your passions. There are more part-time jobs available than ever before, thanks to online marketplaces that match people who have skillsets with those who need help in a particular area.
You might be surprised at how enjoyable you find the new challenges associated with such a job.
Delay Claiming Social Security
If you wait to claim Social Security until you are 70 years old, you will receive the highest monthly benefit amount for which you’re eligible, based on your earnings history. However, if you’re like many retirees, you will depend on Social Security for the majority of your retirement income. Approximately 62% of retirees receive at least half of their income from Social Security.[ii]
If you can wait to start claiming it, do so. If you can’t, due to your financial picture, health reasons or other circumstances, access it when you need to but I highly recommend consulting with a financial planner before doing so.
If you are married, the age at which you claim your Social Security may depend on your spouse’s available benefits. Educate yourself so that you know what’s best for you – it’s more complicated than you think and could potentially cost you hundreds of thousands of dollars.
Insure Yourself Properly
When you are looking at the reduced income that retirement usually offers, you may be tempted to reduce your homeowners’ insurance levels so you have lower payments. Think of doing so though carefully, because you cannot predict tragedy, and you may not have enough cash on hand to pay for large bills.
Also, you may want to adjust your life insurance in accordance with how many dependents you do or don’t have. For most folks, life insurance typically isn’t needed in retirement.
Don’t forget about long-term care insurance either. It can help cover portions of in-home, assisted living and other care options.
Finally, you may also be able to adjust your auto insurance rates since you won’t be driving to work every day.
With so many choices and so much at stake, we highly recommend you speak with your financial planner before making any decision.
Make Withdrawals at the Right Rates
Many retirees approach their retirement savings as an emergency savings fund that they should preserve, withdrawing as little as possible from it. Or, they take the opposite approach and use their savings as an active checking account, accessing it to pay living expenses without a budget or thinking about how doing so impacts their future.
How can you possibly know how much to withdraw? A longstanding rule of thumb has been that you can safely withdraw 4% of your investments each year and not risk going broke during retirement. For instance, if you have $300,000 saved in a retirement account, you would withdraw $12,000 annually. You also need to monitor inflation rates and adjust your withdrawals accordingly, so that your buying power remains steady.
However, this approach is not without some concerns. Keep in mind that your situation is your own; you must consider how your portfolio is allocated, your risk tolerance, your age at retirement and other issues that will affect how much you can “safely” withdraw annually.
It’s also important to keep an eye on how much your portfolio is earning annually. If you withdraw at 4% but you’re earning less than that, you’re going to need to reduce your withdrawal amounts or change your investments. Conversely, if the market performs well and bumps up your portfolio, you may be able to withdraw more.
Remember that the goal with these withdrawals is to ensure that your assets last throughout retirement, along with giving you enough cash on hand to do the things you’d planned without taking on an austere lifestyle. You can use free online retirement income calculators to see how long your savings will last, depending on various withdrawal rates and asset allocations.
Withdrawals dovetail with every other aspect of financial management – you must pay attention to factors that affect your investments and adjust accordingly. Flexibility is a key in most facets of retirement income management.
Choose the Right Investments
Not everyone wants to keep track of how investment returns affect withdrawals and subsequent budget adjustments. You may opt to invest in things that provide you with regular payments, or a combination of both capital appreciation and regular savings withdrawals.
If you have an investment portfolio, you may be familiar with dividend stocks. You can create a portfolio of stocks that pay increasing dividends and use the payments for living expenses. You can also look at dividend mutual funds. They combine multiple stocks, which tends to be an efficient approach for many investors.
Another approach to diversifying is to invest in rental properties. Rentals can be a good option for people who have some real estate experience and who have both the people and mechanical skills to deal with rental properties, tenants and repairs. Once you have leases signed, you will know how much income to expect each month. You can adjust property rental rates to stay in step with inflation.
Another option that can provide regular payments are various types of annuities, which issue monthly payments throughout your life in exchange for a lump sum. Depending on your situation, this may lock up funds that you will not otherwise be able to access.
Annuities can be complex, and you may want to limit the amount of your income that you put into them. They can also be a smart move because they ensure you won’t run out of money.
Once again, education is the key to making the right decision – which brings us to our final tip that can help ensure you don’t run out of money.
Enlist a Financial Advisor
Believe it or not, but most people approaching retirement don’t consult with a financial advisor. At the same time, only approximately 33% of employees aged 55 years old and up have thought about how much income they’ll need during retirement.
Only 28% have estimated their health care expenses. What those figures make clear is that people do not always enjoy or understand navigating their own financial landscape.[iii]
Don’t avoid the big financial issues, which do not have to be intimidating or frightening. Instead, enlist a financial advisor such as a Certified Financial Planner®, and tap their expertise. They can provide investment guidance, portfolio management, as well help create a retirement income plan that’s right for you.
In short, they can put your mind at ease; most charge a percentage of the investments they manage and many will work on a project basis as well. Shop around and ask questions to find a financial advisor who can answer your them and give you the help you need. In addition to giving you access to expert knowledge and services, you’ll get invaluable peace of mind.
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