Retirement Income Planning
Proper retirement income planning will ensure that your retirement income will last for your lifetime. Today's challenge is to make it last for 25-35 years, or possibly more. Retirement income is the biggest financial worry in the United States.
I have to admit the main focus of my retirement income planning was to contribute to the 401K program at my employer. I contributed the maximum percent that the employer would match. I really was not thinking about the answer to the question "How long will it last?" Then, suddenly, a few months ago, I found myself needing to investigate the answer to that question in earnest.
You see, after 40 years with my employer, and being only in my 50's, my job was eliminated and I found myself instantly retired. Now I'm spending time doing some serious retire income planning.
It is better if you begin planning for your income in retirement very early in your career.
There are different sources to consider that would make up your retirement income. They tend to start at different ages, so you retirement income planning has to look out through your entire retirement life cycle.
Social Security is a source of lifetime income, but, under normal situations, the earliest it will begin is at age 62, and that amount will be at a reduced rate for the rest of your life.
So, the longer you can hold off taking your Social Security retirement income, the better off you will be. For example, if you are entitled to $1000 per month at age 62, but if you wait to your full retirement age (let's say 66) you are entitled to $1400 per month. A 40% increase. However, if you wait until age 70, your monthly check would be $1900. A 90% increase.
With the Social Security situation, some people say start taking it as soon as you can. I can sympathize with that. You need to calculate where your break even point would be on those three options.
A certified investment advisor or certified financial planner can help you with this decision.
Defined Benefit Pensions
Some people are advantaged to have a company defined benefit pension that is a retirement income source for life. Usually, the amount you receive is based upon your pre-retirement income and anything you personally contributed to the plan. The trend now is to have defined contribution pensions (such as the 401K and traditional IRA's). These plans have a fixed amount available based upon your contributions.
There are options available where those retirement income accounts can be converted to lifetime income streams. Part of your retirement income planning will probably be to convert some of your assets to income streams. Read my article on
retirement income streams.
An often overlooked pension benefit for war veterans is the VA pension. If you are at least 65 years old, served during a time of war, and were honorably discharged, you owe it to yourself to check out this benefit to see how much VA pension could be yours.
for more information about this benefit.
401K's and IRA's
As mentioned above, today there are 401K's and IRA's that generally give tax-deferred advantages to your monthly contributions. If possible, plan on withdrawing no more than 4% per year to make it last about 33 years.
There is a one time opportunity coming in 2010 for advantageously converting your 401K or traditional IRA to a Roth IRA where your money grows and can be withdrawn tax free. This can provide an excellent boost to your retirement income planning.
for more information now.
Investments and Savings
You may have liquid savings in CD's, Mutual Funds, etc. that are outside your tax-deferred retirement accounts. This is definitely a good idea. It gives you more flexibility to respond to the unpredictability of life. Many people are converting these savings to income streams to cover essential living expenses.
The main investment that a lot of people have is there home, accounting for nearly half of their net worth. To use your home equity to generate income, your retirement income planning attitude needs to be changed to consider your home as a source of income, instead of an asset to pass down to heirs.
You've probably heard the term 'reverse mortgage'. This is a tool that is used to convert your asset (your home) to an income stream. Read my article on
"What is a reverse mortgage?".
I mention this source last because the old definition of retirement was to stop working forever. However, the current definition includes some level of working for pay. Seventy percent of baby boomers expect to work part time after they retire. The 100+ age group is the fastest growing in the country and the 85+ are next.
Life expectancy has increased to the point where those beginning to retire now - the baby boomers - can expect to have 25-35 or more years in retirement.
The key thing to keep in mind here is that whatever work you decide to do for pay can be on your terms. It will be a work for pay situation that supports the work-life balance you desire.
In general, your work for pay choice will not be like the job you will retire from! Aren't you glad?
Employers are beginning to see the value in the older workers. I said "beginning" because it is not real prevalent now yet, but the trend is in the right direction.
The most ideal work for pay choice would be to be your own boss and work when and how you desire. More on this one later...
Although this isn't usually considered in retirement income planning, reducing your debt by definition increases your income. If you have the opportunity, it is a good idea to pay off (or at least pay down) your debt before you retire.
Reducing your debt needs to be considered in your retirement income planning.
How Much Income Do You Need?
Generally you will hear, you need to plan on needing 60 to 80% of your pre-retirement income to support your current lifestyle. Your pre-retirement income is after deducting what you are saving for retirement. But I have found (as well as, half of current retirees) that you really need close to 100% of your pre-retirement income.
For one thing, health care costs are increasing and you are in the age group where you will need more of it. You may also decide to pay for Long Term Care insurance.
The goal should be to try to generate a separate source income now that will continue into retirement. That would preferable be something you can do from home that would not interfere with your lifestyle requirements.
You want to ensure that your monthly income will, at a minimum, cover your essential living expenses. Your other assets and investments can be used for the 'extras'.
Develop a Plan
First you need to really understand your expenses and which ones are essential. You will need to factor in the effect of inflation. Your expenses today will be double 25 years from now if inflation is only 3%. They will be triple in that same time period if inflation is 5%. Then document your sources of retirement income streams - Social Security, Pensions, etc. Then calculate the gap - the difference between the total income stream and total essential expenses.
Remember to consider the risks to retirement income, such as, inflation, longevity, asset allocation of your portfolio, withdrawing too much from your 401K or IRA, and health care costs.
Determine how to mitigate the risks and cover any gap between your income streams and your essential expenses to make your retirement income planning sound.
The information provided on this website is for informative purposes only. It is recommended that you seek advice for your specific situation from a Certified Investment Advisor or Certified Financial Planner.
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