Retirement Income Planning: Everything You Need to Know *

* Within Reason

Recent data suggests that around 41% of people are worried about how much money they will have for their retirement. With the cost of living rising, many people are concerned about how they will afford and enjoy this stage of their life.

Thankfully, there are plenty of retirement income strategies that will allow you to get the most out of your savings. These include dedicated retirement savings accounts and clear investing strategies. There are countless ways to ensure you have enough money to enjoy your downtime after years of hard work.

For a more detailed look at the best retirement income tips, have a look at the list below. 

Make Sure You're Putting Some Money into Savings

While you may have a savings account already, you must continue adding to it. Whether you do this every month, with every paycheck, or even through other, “tricks,” like setting aside all tips or coupon savings, is up to you. 

What matters most is how you spend your income. Of course, you can't save 100% of your income for your retirement. Sometimes you might have to spend money on fixing up the car or to have a great vacation. Also, spoiler alert, kids cost money! And that's fine. If you are looking for someone to tell you to stop eating avocado toast, move along. 

It is, however, a good idea to leave earmarked retirement savings untouched. This is particularly true if you have accounts that offer good interest rates. So much retirement advice focuses solely on, “investments,” but you can not invest without saving first. By avoiding spending these savings until you retire, you will have more money than you expect. 

There are also dedicated retirement savings accounts which offer different tax advantages. More information on these can be found below. It’s important to remember that putting money aside in a regular savings account and leaving it alone until you retire will help to give you some peace of mind and ease retirement money concerns, especially in down markets. 

Use Your Employer's Retirement Options to Help You Save

Most employers offer some kind of pension scheme or retirement plan (often in the form of a 401k) that you can pay into. What exactly they offer will depend on your area of employment, but you should speak to your employer about what is available to you.

Your employer will often contribute towards your retirement plan. Some employers match whatever you put in, while others will give a certain percentage of the money you put towards your plan. Either way, these options are a great way to save for your retirement and you should make sure to take advantage of employer contributions if you are able.

What you choose to put away each month is usually taken automatically out of your paycheck. This means you don't have to worry about accidentally spending it, as it will already be in your retirement fund.

Make the Most of an Individual Retirement Account

Fun fact: they’re actually called, Individual Retirement Arrangements, not accounts, but commonly referred to as "IRAs," and are a great option for anyone thinking about their retirement. You may have already found yourself wondering, "how is retirement income taxed?" Well, with an IRA, there are great tax benefits available to those who make use of one. 

Contributions to traditional IRAs are tax deductible. So whatever amount of money you put into your IRA, subject to certain limitations, can be deducted from your taxes for that year. You should be aware that once you begin to withdraw it, you will start to be taxed on that money again at your then current income tax rate. Traditional IRAs, however, are still an excellent way to get the most out of your savings. 

Another kind of IRA is a Roth IRA. With these accounts you pay the taxes up front, allowing you to withdraw from them after retirement without incurring additional income tax on those withdrawals. 

The type of IRA you choose will depend on your saving goals. Perhaps you wish to have as much money as possible in your account post-retirement. Or maybe you want to avoid being taxed on your retirement savings as much as possible. Often this decision may depend on your current and future expected tax brackets and earning potential. Many times you'll read or hear about, “Roth conversions,” and wonder what you’re missing out on. It’s important to remember that it’s near impossible to predict which type of account will be, “best,” from a numbers standpoint, so the flexibility of having some savings in each type is often a good compromise. 

There are many different ways to open an IRA. You can use an investment company, a bank, or a personal broker. Whatever way you decide to open an IRA, you'll likely be glad that you did. 

Educate Yourself on Investing

Investing is an excellent way to improve your finances and build a nest egg for the future. Of course, investing is most valuable to you if it's done right. That's why it's so important to ensure you educate yourself about how to invest, and more importantly, how not to invest, before getting started.

These days, you can thankfully start investing with any amount of money. Many apps allow you to invest very small amounts just to get you started on the right track.

Keeping the money you wish to invest in a separate account is a good idea. This stops you from risking your savings on a poor investment.

There are many excellent online resources that will help you begin your investing journey. Podcasts are a great way to learn about investing. I couple I like are, “Bogleheads On Investing,” for general topics, and “Risk Parity Radio,” for retirement investment focus. You may also have heard of the FIRE movement, or, Financial Independence Retire Early. The best place to start there is with the, “ChooseFI,” podcast & website.

There are also many books written by experts that can point you in the right direction. Here are a few of my favorites:

If you haven’t read any books on investing yet, and maybe more importantly, if you’ve already read a bunch but haven’t read this one, I suggest Jack Bogle’s, “Little Book of Common Sense Investing.” It breaks down & simplifies investment for, “the rest of us.” Taking the lessons of this book to heart can save a lot of heartache & money! 

I also really like, “The Simple Path to Wealth,” which breaks down investing and saving based on a series of letters JL Collins wrote to his daughter about money & investing.

Decide on a Retirement Budget

Deciding what your retirement budget will be is the first step in planning for this life stage. Only you know how much you currently spend on your everyday life, so you are the best person to design your budget. Fair warning, most of the folks I work with (including my wife!) dislike this part of the process the most. Don’t worry, it’s not that bad.

The first thing to do is to build your budget around necessities. Food, unavoidable bills, keeping your car in good working condition, any home costs you may still have, and the like. Healthcare is also an often overlooked, but major, factor to consider when projecting retirement expenses. Once you know what you need to spend each month, you can get a better handle on the minimum amount of savings necessary for retirement.

Next, look at what you currently spend your income on aside from necessary purchases and expenses. This could include evenings out, putting money aside for other family members, and even hobbies. Budgeting for these activities or savings allows you to determine what you will have left over.

Many people see retirement as a good time to take up new and relaxing hobbies that you haven't had time for due to work. It's important to calculate the costs of these activities as well.

Perhaps you want to pay for a golf membership or take part in a weekly yoga class to keep yourself fit. Budgeting for the things you've always wanted to try is an important part of any good retirement plan. Some tools that can help you with budgeting can be found here.

Avoid Digging Into Your Retirement Savings Too Soon

Whatever way you choose to save for your retirement, you should do your best to avoid digging into these savings too quickly. While it is tempting to take out more money than planned for a holiday or to pay certain bills, you may ultimately regret it.

Once your income no longer covers all your expenses, you must use savings to pay the difference, but that savings has to last the rest of your life. You may feel justified spending more, but it makes strengthening your savings much more difficult. Retirement is the proverbial marathon, not a sprint. The more careful you are at the start, the better the finish.

Be Clear on What Your Income Sources Will Be

One of the most important ways to plan for your retirement is to figure out where you will get most of your income from. Social Security, pensions, and other typical retirement savings such as 401(k)’s provide most people with the majority of their retirement income. Many people, however, rely on other forms of income after they retire as well. You may be fortunate enough to be receiving some form of income from previous investments. Income from investments is not a guarantee, so unless you have withdrawn the money you have already made through investing & placed it into lower risk savings, you should keep this in mind. In addition, more and more often, adult-aged children are providing a monthly stipend for their retired parents, however, this kind of income isn't always reliable and will depend on the plans you have made with family members. 

Consider Your Withdrawal Plan Options

Having a financially secure retirement requires a prudent  withdrawal strategy. A withdrawal strategy that is both flexible and realistic will help you make your savings last as long as possible. There are several excellent retirement withdrawal options you should consider. 

The first withdrawal option you should know about is called the 4% rule. This rule suggests that you can withdraw 4% of your prudently invested savings to spend in your first year of your retirement, even with the annual amount you withdraw changing based on inflation, without fear of running out of money.

Many people like this approach because it is so simple, however, you must keep a close eye on your savings & investments if you intend to use this withdrawal option, because, as with any rule of thumb, it’s based on averages, and none of our lives are average. Following the 4% rule too rigidly could result in running low on money in retirement, but it can also risk not spending enough.

Fixed-dollar withdrawals is another retirement withdrawal option. You simply take out a set number of dollars from your savings each year to live on. This system offers a predictable way to keep track of your savings, but it provides far less flexibility around real economic & life events. In addition, it doesn’t easily take into account inflation, which has recently reared its head again. In that case, you may need to increase your withdrawal amount every few years to meet the demands of inflation, otherwise, you may not have enough money to live on through the year.

While there are downsides to each kind of withdrawal plan, having one in place is preferable to not having one at all. You can adjust your plans as you see fit and as you need. They are the best way to keep track of your retirement money.

Luckily, there are many tools nowadays, many of them free, to analyze your possible retirement scenarios. Rob Berger has reviewed many on his site, robberger.com. In addition, there are more tools than anyone could ever realistically need on Bogleheads Tools & Calculators.

Learn About Your Possible Social Security Benefits

As you work, you pay a Social Security tax on your income. This is currently 6.2% and it's matched by your employer. When you retire, you will begin to receive monthly Social Security payments based loosely on the amount you contributed during your working life. 

Knowing the amount of Social Security you will get will help you to determine your retirement budget. Anyone can sign up for a, “my Social Security,” online account. There’s an amazing amount of information available on the Social Security Administration’s website. You may even find you have more money coming each month than you previously thought. Social Security payments are a good addition to your retirement plan and mean you can rearrange your budget accordingly. 

Seek Guidance From the Right People

Many different kinds of people will be, or want to place themselves, in a position to offer you assistance and advice when it comes to retirement planning. Getting advice before you retire can help prepare you for both expected & unexpected costs throughout your retirement.

One traditional source for retirement planning advice is a financial advisor. Advisors are employed to offer guidance on your specific retirement situation. They should be able to help you come up with a budget & investment plan that will allow you to get the most out of your retirement savings. Unfortunately, many advisors are more salespeople than advisors, and if you’d like to use an advisor, it is extremely important to choose the right one to work with. Look for an advisor who acts as a fiduciary, which means that they are required to work in your best interest.

Traditionally, financial planners & advisors would charge their clients a percentage of their assets as fees on an annual basis. For retirees, that percentage fee, though small, might grow to make up a large portion of their annual portfolio return. Thankfully, there are more and more advisors working under both flat-fee and hourly fee schedules, known sometimes as, “advice-only.” Be sure to do your research to see which type of advisor is best for you. Though these are far from complete, a list of advice-only advisors can be found here, a list of flat-fee advisors who also manage investments can be found here, and a list of flat fee advisors who focus on retirement can be found here.

Another option is to speak to those who have already retired before you, especially folks who were in a similar financial position to you. This may include being employed in the same line of work or making similar investments if they are willing to share this information with you. 

While advice from these people can be helpful, what worked for them may not always work for you. General advice can better prepare you for your financial future, but it is important to always make plans based on your personal needs.

Knowing the Best Retirement Income Strategies Will Help You Enjoy a Long and Happy Retirement 

There are many different kinds of retirement income strategies. Finding one that works for you makes planning for this stage in your life much easier. With the right retirement plan, you are in control of your financial future. 

If you would like to learn more about retirement income planning, and how I can help guide you through this process, please don’t hesitate to reach out!