Step 1: Determine how much retirement income you’ll need
If you plan to maintain your current lifestyle once you retire, you'll need 60% to 90% 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 living longer. 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 unanticipated financial circumstances.
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 and mutual 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 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, there are three methods that can be particularly useful for Wealth clients.
Annuities are kinds 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.
Charitable remainder trusts
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, such as 5%, 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 defer or potentially eliminate capital gains taxes on the donated assets, and you can allow it to reduce your overall estate tax.
Asset transfers are another creative way to supplement your income. Transfers, such as Grantor Retained Annuity Trusts (GRATs), allow you to receive income 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.
The bottom line
Planning retirement income can be complex. After determining how much you’ll need, identify possible sources of income and find other ways to supplement it. Then, with the appropriate investing strategy, you’ll be on your way to a positive income situation in retirement.
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