By the time you reach retirement, you’ll have spent years of your life working and saving. But once you finally retire, you’ll want to have a retirement income plan in place to stay happy.
To build a successful retirement income plan, you need to ask yourself two foundational questions: (1) what is the purpose of your money; and (2) do you have enough money to do the things that are important to you?
Your answer to the first question depends on a multitude of things, from your family structure to your goals and values. Did you save solely to have dollars to spend and enjoy retirement? Did you save to be able to pass assets to kids or grand-kids and to leave a legacy of financial freedom? Are you passionate about certain causes and want to share your wealth in support of those causes, either during retirement or if you pass? Identifying the purpose of your money is critically important when building your retirement income plan. Answering this question can help you (and your financial professional) make better decisions in developing your retirement income plan.
The answer to the second question will help you and your financial professional make necessary changes to ensure you will have enough for the things that are important to you.
If you answer these questions, putting together an effective and optimal retirement income plan is going to be a smoother process.
Elements of Your Retirement Income Plan
Money isn’t the only thing that matters in retirement, but the other things are often dependent on how much money you’ve saved. Financial freedom comes when you can pay for the things you want to do without fear of running out of money. Financial freedom will mean different things to different people.
One retiree could only have a small retirement account but have a low cost of living and smaller expenses so that it lasts their whole retirement. Another retiree could have a substantial retirement account balance but overspend and drain it sooner than anticipated.
So, it’s critical to come up with a plan that works for you based on your own view of the purpose of your money and how much you have. Here are some things to consider when building a plan:
Your balance sheet. Your balance sheet looks not just at what you own but also at what you owe. You’ll take the combined value of all your assets and subtract all your debts to calculate your net worth. Keep in mind that even if your house will be paid off by retirement, it will still require maintenance and payment of ongoing property taxes and insurance. Your primary home won’t generate income in retirement (unless you plan on downsizing).
Tax planning. A critical part of retirement income planning is to evaluate how to minimize the portion of your retirement assets which will end up with Uncle Sam. This may require an annual exercise to shift the balance of distributions between taxable and deferred retirement accounts, evaluating capital gains, when to take Social Security, whether to convert pre-tax retirement accounts to ROTH accounts, and more. Optimizing your retirement strategy to minimize tax impact could mean the difference between running out of money and leaving a legacy to heirs.
Your Plan Will Change
Your retirement income plan isn’t static. You’ll want to revisit your plan as your personal situation changes over time. We all go through job changes, family structure changes, health changes, and just simply changes in what we want out of life. Change is ok, but we need adapt our retirement income strategy to those changes.
Give us a call and we can help you build and implement your retirement income plan!
Sources
- https://www.federalreserve.gov/econres/scf/dataviz/scf/table/#series:Retirement_Accounts;demographic:all;population:all;units:have
- https://www.nerdwallet.com/article/investing/the-average-retirement-savings-by-age-and-why-you-need-more
- https://www.cnbc.com/2023/03/10/85-year-harvard-happiness-study-found-the-biggest-downside-of-retirement-that-no-one-talks-about.html
- https://www.retireguide.com/retirement-life-leisure/healthy-aging/social-connections
