Financial planning for retirement is a critical component of creating a successful road to retirement. If you have a long enough glide path or enough resources saved you could plan for several different roads to your unique retirement. Planning is the key, the earlier you start planning the better chance you will have at a successful outcome. One of the most important steps in planning for retirement is to estimate your projected retirement income once you are no longer collecting a regular paycheck. What cash flows will cover your expenses in retirement?
Identifying Income Sources in Retirement
Social Security
One of the most critical retirement decisions a person can make is at what age they begin to collect Social Security. If you wait until your full retirement age you collect your full primary insurance amount, if you delay it grows a little each month until you turn 70. No benefit for waiting beyond 70! If you collect prior to your full retirement age your benefit is reduced permanently by a penalty amount for each month early. Benefits are determined by your top 35 years of work history and you must have about 10 years of work to collect Social Security. There are also spousal benefits to consider, which can be collected if even divorced. Finally, the survivor benefit is a key planning topic for married couples. We can run multiple Social Security timing scenarios looking at maximizing benefits and breakeven analysis in our financial planning software.
You can read more about How to Maximize Your Social Security Benefits here.
Retirement Accounts
401(k), 403b, and Traditional IRAs are all tax-deferred accounts. Money that comes out of these accounts are usually taxed as ordinary income. Roth IRA and Roth 401k buckets are tax-free buckets in retirement.
You can read more about Tax Diversification Within Retirement Accounts here.
You should consider moving to a more conservative asset allocation in your retirement years. Fixed Income securities can provide steady income flow while providing ballast should the equity markets sell-off. Having an emergency fund (use our Emergency Fund Calculator) is prudent even in retirement for unexpected expenses or if we get a repeat of 2022, where both the fixed income and equity markets were both down significantly in the same year.
You can read more about Risk Within Retirement Accounts here.
Rental Income
Do you have real estate that kicks off monthly mailbox money for your retirement budget? Consider potential expenses for a rental property that may need to be paid for, from the small yearly projects to big spending one-time items such as a new roof. Will you raise the rent of your tenants to keep up with inflation? Are you limited by law from increasing the rent? At what point will you sell the rental property, or will you leave it to the next generation?
Pension Income
The steady cash flow from a pension can assist with paying for expenses in retirement. One important consideration for pensions is if it has an annual cost-of-living adjustment (COLA). If you are married, what is the survivor benefit if the owner of the pension passes away?
Part-Time Work
Some people are hesitant to go “full retirement” right out of the gate. Part-time work can help ease the transition into retirement and help the budget along the way. We see individuals who will work part-time just to pick up health care benefits before Medicare age at 65.
Reviewing your projected retirement income is an important step in retirement planning. Don’t hesitate to seek the advice of a financial planner if you need help reviewing your projected retirement income. With careful planning and disciplined savings, you can achieve your retirement goals and enjoy a comfortable retirement.
