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Income Planning During Retirement

MP900404926Retirement may bring an end to your work life, but your responsibilities just change gears. You have to learn how to navigate Medicare and manage an investment portfolio.

People who may have been happy to let their investment company handle their retirement savings face big decisions in retirement, including how much risk they are willing to take. An article in Kiplinger, “How to Generate Income in Retirement,” explains that income planning during retirement is a complicated issue. Striking a balance between investment risk tolerance, lifestyle choices and the big unknown—longevity—is a very personal decision. There is no one-size-fits-all answer.

Having a budget in place is the foundation of retirement planning. Start by determining your expenses, and then make some modifications by considering these retirement-specific issues:

  • Lifestyle plans. Will you travel extensively or settle down in a less expensive community?
  • Life expectancy. Today, the average 65-year-old will live almost 20 years, but that’s an average.
  • Health care. There’s more to it than just paying Medicare premiums. Don’t forget about long-term care, prescription drugs and other out-of-pocket expenses. These all need to be in your budget.
  • You’ll still be filing a return, so plan ahead.
  • It will impact your normal, everyday expenses, and your dollar may not stretch as far year after year.

Once you have the estimates based on your own lifestyle costs and what may happen, start strategizing for your income. First, look at your income sources. Most retirees get their incomes from a combination of the following:

  • Social Security benefits;
  • Employer pension plans or annuities;
  • Qualified retirement accounts and other financial investments;
  • Income-generating investments like property or a privately held business; and
  • A part-time job, if necessary.

Some income sources are static, while others are discretionary. Consider how your “guaranteed” or static income sources relate to your budget. Will it work, or will you need to supplement them with money from your investments?

That is the tough question for retirees and their financial assets. You want to generate income for as long as possible, but you also want to know that your savings are secure. To balance these competing priorities, you may need to assume more investment risk than you anticipated.

If your investments are growing at a low but steady rate that keeps up with inflation, you won’t have fluctuating returns.  However, you will be losing money every year with withdrawals. You could outlive your assets. If you assume more investment risk, you’re more likely to achieve higher long-term growth, and you’re less likely to outlive your savings.  However, that means you also have higher investment account volatility and a greater chance of losing principal in down markets.

These are the kind of decisions that are very personal, and what works for your best friend down the road may be completely wrong for you. You’ll need to do a careful assessment of how much income you will need to maintain your desired lifestyle, what kind of (and how many) income sources you have, and how much of your investment accounts you’ll need for income.

Reference: Kiplinger (June 2017) “How to Generate Income in Retirement”