Planning your retirement income can feel overwhelming, but breaking it down into manageable steps can make the process smoother and more effective. To help you create a robust retirement income plan, we’ve outlined six simple steps that you can follow at any stage of your career, whether you are just starting out or on the cusp of retirement.
Step 1: Decide When You Want to Retire
When you plan to retire is one of the most critical questions in your retirement income planning. The average retirement age in the U.S. is 62, but retiring early can mean a reduction in social security benefits. It’s important to consider whether you’d prefer retiring completely or slowly reducing work hours over time. Working fewer hours initially can ease you into full retirement, helping preserve your income stream and securing maximum social security benefits.
Deciding when to retire involves personal preferences and considerations. If you have a partner, do you wish to retire simultaneously? Do you have children or grandchildren you want to spend more time with before they reach key life milestones like graduation and potential relocation? Setting a target retirement age helps with planning and achieving your retirement goals.
Step 2: Estimate Your Retirement Living Expenses
Understanding how much you’ll spend annually after retiring is crucial. Retirement expenses can fluctuate, especially as you age. At around 65, spending trends show a shift, often decreasing in housing costs but increasing in healthcare expenses.
One useful tool for planning is a retirement calculator. These calculators can provide estimates that help outline your future financial needs. Staying mindful of essential categories like housing, transportation, healthcare, food, personal insurance, pensions, and entertainment can help you build a realistic budget. Aim to replace at least 70% of your pre-retirement income to maintain your lifestyle.
Step 3: Create a Retirement Investing Strategy
Investing is a pivotal part of retirement planning. Simply saving is not enough due to inflation eroding the value of your savings over time. Investing helps grow your money over the years. Decide on your risk tolerance: high risk can yield potentially higher returns, whereas low risk typically offers more stability but lower returns.
Common approaches to retirement investing include:
– Income Investing: Generating needed income through interest and dividends. For instance, a $400,000 account with a 7% return would give you $28,000 annually.
– Total Return Investing: Setting a target return from all sources like selling securities, interest, dividends, etc. Adjusting your investment approach as you get closer to retirement can help maximize your returns.
Step 4: Identify Recurring Sources of Retirement Income
Consider all possible sources of income during retirement:
– Investment Returns: These can vary based on your investment strategy and how much is invested.
– Social Security: Use calculators to estimate benefits. Note that future changes might affect these returns.
– Pensions: If available, include pension income in your plan.
– Annuity Income: An income annuity can add another layer of financial stability.
Step 5: Develop a Withdrawal Plan that Includes Taxes
Withdrawing from your retirement accounts involves planning for taxes and inflation. A financial advisor can help devise a withdrawal strategy that minimizes tax impact. Generally, advisors recommend withdrawing first from taxable accounts, followed by tax-deferred ones, and lastly, tax-exempt accounts.
Step 6: Consider Selling Your Life Insurance for a Lump Cash Sum
Life insurance policies taken out during one’s working years might become less relevant in retirement. Premiums may no longer be justified, especially if beneficiaries are now self-sufficient. Selling your life insurance through a life settlement can provide a cash lump sum, potentially up to 60% of the policy’s death benefit. This can significantly contribute to your retirement income.
In conclusion, planning your retirement income is a multifaceted process that involves setting goals, estimating expenses, investing wisely, considering ongoing income sources, and preparing a withdrawal plan. If you’re contemplating selling your life insurance policy to bolster your retirement savings, we are here to help. Our team has the expertise and resources to guide you through the process, ensuring you make informed decisions that align with your financial goals for a secure and enjoyable retirement.
