We always encourage our clients to think through what their ideal retirement looks like. And by “ideal,” we are not referring to a dollar amount, but to a lifestyle. An ideal retirement is one that allows you to live out True Wealth every day. We define True Wealth as all the things in life that money cannot buy, and death cannot take away. While the specifics of True Wealth looks different to each individual or couple, a consistent, reliable stream of income to cover your expenses is a necessity. Today’s blog will focus on three components of a successful retirement income plan that work together to improve the sustainability of your income streams throughout your retirement.
1.) Guaranteed Income: For those individuals close to or in retirement, it is wise to determine how much of your retirement income has some type of guarantee associated with it and whether you could benefit from adding more guaranteed income to your plan. Guaranteed income would be anything that is guaranteed to provide you with recurring income for a set time period—usually the rest of your life. Sources such as Social Security and pensions would fall into this category. There are tools available such as fixed index annuities issued by insurance companies that can also serve as a way of guaranteeing a stream of income for the rest of your life. One viable approach is to determine how much of your retirement spending budget is non-negotiable and then seek to lock in guarantees to cover that amount. If you have a non-negotiable budget of $3,000 per month and pensions and Social Security cover $2,500 per month, you may look to purchase a fixed index annuity to cover the remaining $500 need. The other items in your budget that are more flexible can then be covered by non-guaranteed, market-based investments.
2.) Making Small Adjustments: Another important behavior that can improve the quality and sustainability of your retirement income is committing to making small adjustments over time. Research has shown that setting a fixed level of income at the start of retirement and then blindly sticking to it through all of the ups and downs of the market can lead to one of two outcomes—either an increased likelihood of depleting the retirement assets too quickly or, on the other hand, spending far less than your retirement assets can support over the entirety of your retirement. Alternatively, by being willing to make small decreases to spending in negative stock market environments and allowing spending to increase during good stock market environments, the retirement spending plan is much more likely to provide a higher level of income throughout the entirety of the retirement.
3.) Impact of Taxes: One additional factor to keep in mind is the impact of taxes on a retirement income plan. Currently, much of the retirement wealth held by retirees and pre-retirees in this country is in pre-tax accounts. This means that once an individual begins taking withdrawals to help fund their retirement, they are subject to tax rates at that time. With current tax rates being quite low from a historical perspective it may benefit a retirement plan to voluntarily pay taxes on some or all the pre-tax retirement dollars in exchange for avoiding future taxes on a potentially higher balance at potentially higher rates down the road. One way to accomplish this is to implement a Roth conversion strategy. Roth conversions allow a saver to pay taxes on their pre-tax retirement dollars now and then move them into a tax-free Roth account for further growth in the future.
Andy
Andy Anderson, CFP®