When thinking about saving for retirement, you may think that your 401(k) coupled with Social Security will provide the regular income you’ll need to fund your retirement. Unfortunately, that scenario has become less and less realistic over the past decades. If you’re like most folks, you probably haven’t had the means to contribute sufficiently to your retirement accounts. Additionally, the future of Social Security is increasingly uncertain. Not satisfying basic income needs is one of the most common mistakes we see people make when they plan for retirement, if they plan at all. Ample, predictable income is the name of the retirement game. So, you need a solid game plan to get there.
The first step is having a realistic estimation of what your yearly expenses will be once you enter retirement. And, don’t just plan for the bare minimum. Ample income includes both living expenses and lifestyle expenses, so you can have the financial freedom to enjoy your retirement years and have enough cushion to handle the unknowns, too. Next, you should look at the total of your investable assets; these are liquid assets you can invest to generate growth. These should be invested to provide the appropriate amount of diversification for your specific risk tolerance, and the expected returns should be sufficient to cover your target budget for retirement. For more on risk and diversification, read The Rule of 100 and Don’t Put Your Nest Egg in One Basket.
You want to use your investments and any insurance policies or retirement accounts to provide multiple income streams during your retirement. Having multiple income streams allows you to better manage risk within your portfolio so that, as you age, you can shift from an accumulation strategy to a preservation strategy. Within your portfolio, it’s common to carry investments with varying levels of risk. We think it’s wise to use a tiered income approach for the disbursement and utilization of these income streams so that you can plan in advance exactly how much money you can expect every year of your retirement.
This approach also allows you to draw from them only what you need to meet your pre-determined budget, so the rest can continue to grow tax-deferred. Be sure you start by calculating in your Social Security payment and any required minimum distributions (RMDs) you’ll be required to take for the year, so you don’t incur any additional tax liability. If used strategically, a tiered income plan will help you monitor and minimize your tax burden, maximize the use of tax-free income strategies to account for inflation, and phase out risk over time.
The end goal of a strategic retirement plan is not only to ensure you’ll have enough income to satisfy your budget, but also to provide you with enough money to enjoy your retirement no matter how you want to spend it. But an income plan like this can be complex. You need to revisit your strategy annually since requirements for Social Security, your retirement accounts and your investments can change at any time. We always recommend that you work with a trusted financial advisor to make sure you don’t have to worry about your income needs during retirement. If you don’t yet have an advisor, get in touch with us. We’d be happy to give you more information.