As you approach or enter retirement, one of the most pressing questions is, “Will I have enough income to live comfortably for the rest of my life?” This is a question we often get from clients, and it’s a valid concern. Retirement can last 20 or even 30 years, and ensuring your income covers that time without running out is key to peace of mind.
Income planning for retirement isn’t just about managing your money—it’s about maintaining the lifestyle you worked hard for and accounting for life’s unpredictability. We discuss important steps to building a solid income strategy for your retirement years, including Social Security, investments, and how to protect yourself from outliving your savings.
Start with a Detailed Budget
Income planning begins with understanding how much money you’ll need monthly to cover your expenses. By having a clear sense of what your retirement spending will look like, you can make informed decisions about how to distribute your income streams. The budget you had during your working years might not be the same one you’ll use in retirement. First, consider your fixed expenses like housing, insurance, and utilities. Then, factor in your discretionary spending—travel, dining out, and hobbies. Your medical expenses may also increase as you age, so it’s important to account for potential healthcare costs.
Social Security: A Foundation, But Not the Whole Picture
For many retirees, Social Security is a primary source of income. The age at which you begin claiming Social Security can significantly affect the amount you receive. While you’re eligible to start benefits at 62, your monthly payment will be higher if you delay claiming until your full retirement age (between 66 and 67 for most people) or even until age 70. Each year you delay after your full retirement age, your benefits increase by about 8%.1 It’s important to remember that Social Security is not designed to replace your pre-retirement income, and you may have a significant gap that needs to be filled from other sources.
Pensions: A Reliable Source (If You Have One)
If you’re fortunate enough to have a pension, it can provide a steady, reliable income throughout retirement. Pensions were once common, but today, they’re far less so. If you have a pension, we can help you understand the available payout options. Do you take a lump sum and invest it yourself, or do you take a guaranteed monthly payment for life? Choosing the right option depends on several factors, including your health, risk tolerance, and whether you want to leave a legacy for your heirs.
Manage Your Investments Wisely
Many retirees’ most significant source of income comes from investments, such as 401(k)s, IRAs, or taxable accounts. A key part of income planning is figuring out how to draw from these investments to provide steady income while preserving your assets for as long as possible. At Northern Way, we utilize a Bucket Strategy, which emphasizes segmenting funds into distinct “buckets” based on their purpose and time horizon. Each bucket serves a specific function and is designed to address various financial needs throughout retirement. By implementing this strategy, you’ll have access to cash in the short term; your intermediate bucket investments should keep pace with inflation, and long-term bucket investments are allocated to grow your nest egg more than inflation, allowing you to refill your immediate and intermediate buckets.
Managing Taxes in Retirement
Retirement income planning isn’t just about how much money you have—it’s about how much you keep after taxes. Developing a tax-efficient withdrawal strategy to reduce your tax liability is important. For example, you might consider drawing from your taxable accounts first, followed by your tax-deferred accounts like traditional IRAs or 401(k)s, and then Roth IRAs, which offer tax-free withdrawals if certain conditions are met.
Plan for Healthcare and Long-Term Care Costs
Healthcare costs tend to rise as you age, and Medicare doesn’t cover everything. You’ll likely need supplemental insurance to cover dental, vision, and long-term care gaps. Long-term care can be costly; without proper planning, it can quickly deplete your savings. Long-term care insurance or hybrid life insurance policies that include long-term care coverage can provide the financial resources you need to cover extended care costs without dipping into your retirement nest egg.
Revisit Your Plan Regularly
Income planning isn’t something you do once and forget about. Reviewing your plan regularly is important, especially as market conditions, tax laws, and your personal circumstances change. Whether it’s adjusting your withdrawal strategy, rebalancing your investment portfolio, or reassessing your budget, staying flexible will help you navigate the uncertainties of retirement.
Conclusion: Plan for a Confident Retirement
Income planning in retirement is about more than just making ends meet—it’s about ensuring you can enjoy your retirement years without worrying about running out of money. By carefully managing your income streams, minimizing your tax burden, and protecting yourself from the risks of outliving your savings, you can create a retirement plan to help you make the most of your retirement years.
