retirement income

Fundamentals of Retirement Income Planning

Properly timing the distribution of income during retirement is critically important to living a financially secure in your golden years.

There are two main risks of not timing your income distributions correctly. These risks include running out of money too soon and not living the lifestyle you could have afforded. Neither of these situations are optimal, thus we need to carefully plan for the distribution of assets during retirement.

Goals of Retirement Income Distribution

As stated above, its critical that you create a robust income distribution plan. In order to accomplish this, you will need to determine all of your sources of retirement income and their available distribution options.

Once that is complete you can begin to determine what retirement income distribution strategies are available to you. This will help optimize your income situation so you can live your desired lifestyle during retirement.

Types of Retirement Income Distribution

Depending on what type of asset and retirement accounts you have, you will probably be constrained to a few common income distribution scenarios.

Lump Sum - Lump sum distributions are taken all at once. This option provides you with funding flexibility in the event that your expenses become unpredictable or vary widely from month to month.

Systematic Withdraws - In contrast to the lump sum payment options, some asset and retirement accounts will allow you to take systematic withdraws. These withdraws will be taken in the same amount every month or payment period. This option provides less flexibility, but more financial security.

Required Distributions - Finally, some asset accounts will require you to take distributions at a certain point in time. These distributions are usually age based, such as Social Security. In this plan you will have to being to withdraw benefits at age 70.

Retirement Income Distribution Strategy

Since the point of developing a retirement plan is to ensure that you use your retirement income wisely, start your strategy by timing your cash flows. Since everyone has a different retirement situation, I have provided the following objectives to help guide your retirement income distribution strategy.

Create a Strong Foundation - I like to being a retirement cash flow plan by determining a client's fixed costs during retirement. This helps me determine how much money will be absolutely needed every month. If at all possible, I also like to have monthly systematic withdraws cover all monthly fixed costs (mortgage, food, clothing, etc.). This helps secure my client’s financial future.

Increase Flexibility as Needed - Hopefully you have enough annuity or systematic income options to cover fixed expense. If this is true, you can then use your lump sum income options for flexible expenses such as vacations, entertainment and other discretionary expenses. However, if you do not have enough systematic income to cover your fixed expenses, you may need to tap into your lump sum accounts to help supplement your fixed monthly income.

Retirement income planning can quickly become a complicated matter. This is due to the constraints that many retirement plans place on our ability to withdraw benefits when we need them. By taking the time and developing a solid income distribution strategy, you can increase your financial security and live the best retirement that you can.

How Much Do I Need to Retire

One of the most common questions concerning retirement, is “how much money will I need to retire”. This question is extremely important and forms the foundation of retirement planning. Despite the fact that the answer to this question can become complex, it’s not as difficult to figure out as you might think.

Define Your Retirement Lifestyle and Goals

Just like developing your comprehensive financial plan, retirement planning starts with defining your goals and lifestyle. Once you have a clear sense of how you want to live your life, you will be able to determine how much it will probably cost.

Some topics to plan for include when to retire (age and year), what activities to enjoy (housing, vacations and gifts) and how long you will be retired (I assume to live to 100 for financial planning purposes). Retirement planning is all about determining how much money you will need to cover your expenses. Thus it’s imperative that you calculate how much your lifestyle will cost.

In addition to retirement expenses, its a good idea to take the time to decide if you would like to pass any left over assets to your heirs. If you would like to leave some assets to your loved ones, you will need to ensure that you have enough money to live your desired lifestyle during retirement and have enough left over to pass through your estate.

Determine How To Finance Your Retirement

Once you have determined your desired lifestyle during retirement, its time to figure out how to finance it. Hopefully you have acquired enough assets in your lifetime to fully fund your retirement. A few retirement income source examples include your savings, investment, Social Security and IRAs. These sources of income will need to be enough to maintain your desired standard of living, so take the time and estimate your income during retirement.

Estimating your retirement income can be a little tricky, however after a little research you should be close enough to the right answer. Once have estimated your future income and expenses, its time to determine if you will have enough to live the life you want. If you have performed the necessary calculations and have found that you will have enough to meet all of your goals, congratulations! If not, you might need to revise your retirement plan and expectations.

Fix Any Retirement Planning Shortfalls

If you have done the math and figured out that you might not have enough money to live the life you want during retirement, you are not alone and still have a few choices. First you could decide to go on fewer vacations or move into a smaller residence. You could also make the decision to keep your car longer than you expected. These ideas will help you reduce some of your expenses during retirement. Second, you could change your income situation.

Many potential retirees are postponing retirement for a few years in-order to save a few extra dollars before they leave the workforce. Lastly, you could decide to take up some easy part-time job to supplement your existing retirement income.

As illustrated in this article, answering the question “how much do I need to retire” is rather straight forward. First, determine your goals and desired lifestyle. Next, figure out how much that lifestyle will cost during your retirement. Then calculate your income sources and their amount during retirement. Finally, determine if you have enough money to live the life you want and if not make adjustment so you can.

5 Important Sources of Retirement Income

Before we begin to transition into retirement, we need to make a few difficult decisions. In the best case scenario, you have the opportunity to participate in an employer sponsored savings plan and have little cash left over to invest on your own. If you don’t have that opportunity, you will still have a couple of retirement income options. As you develop your retirement plan, ensure that you consider these potential sources of retirement income.

Government Sponsored Retirement Plans

I’m sure that most of you are familiar with Social Security. It is probably the most popular and controversial Federal program. If you have worked in the past few decades, chances are that you have already paid your fair share of Old-Age, Survivors, and Disability Insurance (OASDI or Social Security) tax.

This tax can be described as an automated savings plan (ignoring the complexity of Government programs) for retirees, spouses and individuals with disabilities. At the age of 62 you will be able to start receiving benefits. This income source is usually the foundation of most retirement plans.

Corporate Sponsored Retirement Plans

There are many different employer sponsored retirement plans. The long list includes 401(k)s, stock bonuses, profit sharing and defined benefits plans. It’s advantageous to take advantage of as many employer sponsored retirement plans as you can. This is due to the fact that these usually have notable tax benefits.

In addition the savings are automatic and can sometimes be hassle free. Due to the tax advantages of these plans, there are usually strict rules on how and when the benefits can be used. Regardless, these provide a great income source during retirement.

Individual Retirement Plans

In addition to Government and Employer retirement plans, you should also decided to take matters into your own hands and utilize a few common retirement plans. Like employer sponsored plans, these options are regulated, have tax advantages (depending on your financial situation) and come with income withdraw rules. Individual Retirement Accounts (IRAs) is and example of an individual retirement plan.

You can contribute up to $5,000 if you are under 50 and up to $6,000 if you are 50 or older every year. Over time, these accounts could grow to a nice financial safety net and eventually help to supplement other retirement income sources.

Individual Investment Accounts

Another great source of retirement income is your own personal investments. You should make the effort to build and grow a diversified portfolio of stocks, bonds and other assets. Once you get close to retirement age, its important to ensure that your individual investments are less volatile (i.e. higher bond allocation).

Your personal portfolio has significantly less restriction than other retirement income sources. This is due to the fact that you are investing after-tax income, thus they provide very limited tax benefits. In retirement your personal portfolio can be converted to an annuity, which would provide a steady stream of income during retirement.

Employment During Retirement

In addition to all of the important income sources above, you may also choose to fund your retirement through additional employment. Many people choose to stay in the workforce to a certain extent during retirement. Part-time employment can not only provide a paycheck, but can also help keep you active and engaged in your community.

There are many different sources of retirement income to choose from. However, its important to start early and take advantage of the Government and Employer programs available to you. Remember not to rely too much on these sponsored plans as they can change as quickly as the political environment. Make sure you are saving a little extra money and invest in your future.