“Solving the retirement puzzle can require using investments for liquidity and growth, insurance products for income and principal protection and possibly alternative investments for diversification. That requires a plan.”
Kiplinger’s recent article, “Plot a Smoother Retirement Journey with a Written Income Plan,” explains that Social Security is expected to play a major role in providing income for many retirees. However, unless you’re willing to live a fairly Spartan lifestyle, it shouldn’t be your only resource for income. According to the Social Security Administration, the average retiree will get $1,360 a month this year. The benefits typically replace about 40% of a worker’s pre-retirement income.
Some workers are lucky to have a pension as an additional layer of support. However, an employer pension has become almost non-existent in the past few decades. As a result, many retirees will have to fill the income gap from other sources—such as their own savings and investments—and the money earned on those investments or through post-retirement employment.
This means you need to be smart with your portfolio. It’s critical to your long-term financial security. The way you manage those assets, may determine how you’re going to live in the next three to four decades. Therefore, pre-retirees and retirees should have a detailed, written income plan.
An income plan is like a jigsaw puzzle—with many pieces that should fit together to give you the lifestyle you want. This will include your savings, Social Security, pensions, real estate, 401(k)s and IRAs. The shape and size of each of these puzzle pieces will be based on several factors, including the following:
- The age you plan to retire;
- Your overall net after-tax income goal;
- The size of your overall retirement portfolio;
- Your tax situation now and in the future; and
- Your legacy goals.
A solid income plan can help you to really optimize each piece of your puzzle. That can mean leveraging your investments for liquidity and growth, insurance for income and principal protection and alternative investments for diversification, as well as maximizing your Social Security benefits. Speaking of Social Security, you’ll get higher benefits by waiting as long as possible to claim them. You can choose to retire as early as age 62, but if you do, it can mean a reduction of as much as 30%. If you wait, you can receive your largest benefit by retiring at age 70.
Here are some steps to take that can help you with your retirement math problem:
- Inventory your expenses;
- Make a list of your income sources;
- Compare your estimated essential expenses with your predictable income sources from Step 2;
- Create your plan and allocate assets to accomplish your essential expenses; and
- Protect against the unknown and be ready to update your plan, when needed.
Speak with a financial adviser and estate planning attorney to create an income plan that can help you in the years ahead.
Reference: Kiplinger (October 2017) “Plot a Smoother Retirement Journey with a Written Income Plan”