Retirement is often anticipated with both excitement and worry. For many people, knowing how to maintain an appropriate income stream for your lifestyle is a primary concern. Fortunately, with proper retirement income planning you can enter your post-work years with confidence.
Step 1: Determine How Much Retirement Income You Will Need
If you plan to maintain your current lifestyle once you retire, you'll need 60-90 percent of your pre-retirement income. Other things you'll want to consider include:
- Retirement goals. Do your goals include travel or starting a new hobby? If so, consider the costs associated with these new ventures.
- Healthcare. With age comes increased risk of health issues. Plan for both expected and unexpected events, as well as rising medical costs.
- Longevity. Today's retirees are enjoying much longer lives. Consider that your retirement could last 30 years or more.
- Inflation rates. Inflation rates of 3% to 4% could lead to prices doubling within two decades.
- Market volatility. There are no guarantees when it comes to financial performance. Consult your financial advisor to make sure your retirement portfolio can withstand the ups and downs of the market.
- Unforeseen expenses. Build in extra savings for unexpected events.
Step 2: Identify Existing Sources of Income
There are a number of ways to accumulate wealth before retirement. Some of the most common include:
- Traditional and Roth IRAs
- Workplace retirement plans, 401(k)s and 403(b)s
- Pension payments
- Savings and money market accounts
- CDs (Certificates of Deposit)
- Treasury bills
- Social Security payments
- Stocks, bonds, mutual and hedge funds
- Real estate investments
Ideally, you'll want numerous and diverse sources of income, an income-producing cash reserve (CDs, treasury bills, savings accounts and money market accounts), and long-term investment sources (stocks, bonds, mutual and hedge funds, and real estate) from which you withdraw dividends and interest.
Step 3: Add Supplemental Income to Your Retirement Portfolio
Though there are a number of ways to supplement your income, three secure methods are annuities, charitable remainder trusts and asset transfers.
- Annuities are a form of income insurance. An immediate annuity requires a lump-sum premium and, like a pension, provides an appointed monthly payment. Deferred annuities allow you to invest over time and then withdraw your gains in a lump sum or guaranteed percentage payments. Learn more about annuities.
- Charitable Remainder Trusts allow you to donate assets such as securities, businesses or real estate (not including the home you live in) to a charity upon your death while receiving an annual income from a set percentage of the donation (5%, for example) while you're living.
There are numerous other benefits to charitable remainder trusts. You can record the trust as a charitable deduction on your income taxes, use it to avoid capital gains taxes on the donated assets, and you can allow it to reduce your overall estate tax. Learn more about Charitable Remainder Trusts.
- Asset Transfers are another creative way to supplement your income. Transfers, such as Grantor Retained Annuity Trusts (GRATs) and family trusts allow you to receive dividends from your estate. With a GRAT, the grantor, rather than the beneficiary, receives full benefits from the transfer. To achieve this, you’ll want to set up a limited term that you're most likely to outlive. For example, if you expect to have a 30-year retirement, you could set up a 20-year GRAT. If you don't outlive it, the money will return to your estate. A family trust allows you to transfer assets, but is designed to benefit your beneficiary upon your death. Learn more about Grantor Retained Annuity Trusts.
Ready to Take Action?
Planning retirement income can be complex. The best way to explore your options while navigating around potential pitfalls is to seek the advice of your financial advisor.
Email an advisor or call us at 800-388-3085.