For most soon-to-be retirees, the idea of no longer receiving a paycheck and relying on savings and retirement income to make ends meet is scary. With proper planning and strategy, you can create your own retirement “paycheck” using various sources of retirement income. The following tips can help you get started.
1. Understand your current financial situation.
The first step in establishing a retirement paycheck is to gain a full understanding of your current financial situation, including your savings, investments, potential Social Security benefits, pension benefits, and any additional sources of income you expect to receive during retirement.
2. Estimate your monthly expenses.
Once you understand your current financial situation, the next step is to determine how much you’ll need to spend each month based on your desired retirement lifestyle. This will include your required monthly expenses like the cost of housing, healthcare, transportation, food, etc. Additionally, you’ll want to include discretionary spending (“the fun stuff”), such as travel, entertainment, and hobbies. You should also consider if there are any large purchases you hope to make in retirement, such as a second home, a boat, new cars, big trips, gifting to family members, etc.
3. Identify any potential income gaps.
Compare your expected retirement income sources to your estimated expenses. Do you have enough to pay for your desired lifestyle? If not, you’ll need to review your monthly spending expectations, focusing on the amount, timing, and/or frequency of your discretionary spending and big-ticket purchases. Alternatively, identify additional sources of retirement income (e.g. part-time work) to bridge the gap.
4. Implement a strategic withdrawal strategy.
A tax-efficient, strategic withdrawal strategy can provide a steady stream of monthly income and help ensure you don’t outlive your assets. If you have retirement accounts with different tax characteristics (taxable, tax-deferred, tax-exempt, etc.), you’ll likely have flexibility to minimize your tax obligations while optimizing your monthly income.
The benefit of following a disciplined withdrawal strategy is that you can monitor your ongoing expenditures, making changes as needed to ensure you don’t spend more than you can afford in any given year. This practice can help you maintain adequate assets to last a lifetime, regardless of market volatility.
5. Maintain an emergency fund.
Once you retire and say goodbye to your earned income stream, the first priority is to fund and maintain an emergency fund for unexpected expenses. This fund should be prioritized above all other savings and helps ensure you don’t need to dip into retirement savings or sell investments at inopportune times to pay for unforeseen expenses.
6. Plan for healthcare and long-term care expenses.
We can all count on healthcare expenses at some point in our lives. It’s imperative to have a plan to cover the possibility of increased healthcare needs in retirement. While there are many ways to account for these expenses, retirees should consider supplemental health insurance, use of tax advantaged health savings accounts (pre-retirement), and whether long-term care insurance is appropriate to help protect their retirement savings from unexpected medical expenses.
7. Incorporate Social Security planning.
It’s important to carefully consider the timing of your Social Security benefits in order to maximize the amount you’ll receive over your lifetime. Filing for benefits early means you’ll start receiving payments earlier but at a reduced monthly amount. On the other hand, delaying until age 70 to begin taking benefits means you’ll receive an increased monthly payment, growing at 8 percent per year following your full retirement age through age 70.
You and your wealth manager can determine a Social Security timing strategy that makes sense given your personal financial situation, benefit options, and retirement goals.