Retirement Income Planning: 5 Actions to Consider

Retirement can be an exciting next chapter in your life, offering new beginnings and opportunities. Coming up with a retirement income plan can help you financially prepare for the long and fulfilling retirement you want. Here are some considerations when it comes to retirement income planning.

Start by creating a personalized estimate to help determine how much income you will need in retirement. That estimate should be based on:

• Fixed expenses: These are basic, ongoing expenses including food, mortgage or rent payments, transportation, insurance premiums, health care costs, taxes, and other nondiscretionary living expenses.
• Discretionary expenses: These include entertainment, travel, recreation, charitable giving, and luxury items. Because these are deemed nonessential, you can potentially lower or postpone them during periods of market volatility or if your financial situation changes.

Start by creating a personalized estimate to help determine how much income you will need in retirement. That estimate should be based on:

• Retirement savings, including 401(k), 403(b), and 457 plans
• Nonretirement savings, including brokerage accounts and savings accounts
• Social Security
• Traditional pension plans (defined benefit plans)
• Annuities
• Full- or part-time employment
• Real estate or other income-generating sources
• Inheritance

Once you’ve estimated your income in retirement, compare it to your estimated expenses to see if there’s a gap between the two totals. If you don’t have enough money for your ideal retirement, you may want to consider revising the amount you’re saving, your retirement goals, or both.

Have you ever heard of the 4% withdrawal strategy? To follow the 4% approach, investors withdraw no more than 4% of retirement savings and investments as income in the first year of retirement; in subsequent years, they adjust that percentage for inflation. That guidance does not necessarily fit everyone’s financial situation, however.

One less rigid approach to potentially consider includes flexible withdrawals based on your portfolio’s performance, your spending needs, and your lifestyle. Withdrawal strategies could include weighing short-term income needs, managing potential tax implications, and maintaining your portfolio allocation so it aligns with your long-term objectives.

Conventional wisdom leans toward tapping into taxable accounts before tax-deferred ones. By starting with those accounts, your tax-deferred assets can potentially continue to grow on a tax-advantaged basis.

But that might not be the best approach depending on your situation. Consult with your tax advisor before assuming withdrawals from taxable accounts are your best first step.

Required minimum distributions (RMDs) can also have tax implications. These are amounts you must begin withdrawing from traditional IRAs, simplified employee pension plan (SEP) IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, and employer-sponsored qualified retirement plans (such as 401(k)s and 403(b)s), upon attaining the designated age. The amounts you need to withdraw may impact your tax rate. Failure to take an RMD on time or in the right amount may result in an additional tax at the Federal level for every dollar under-distributed.

Planning for income in retirement:

• Explore your vision for your non-working years.
• Identify your essential and discretionary expenses.
• Inventory potential sources of income in retirement.
• Identify and create a plan to help fill any income gaps

Managing income in retirement:

• Periodically review expenses and make the necessary adjustments to your spending and withdrawal strategies.
• Review your income and tax situations regularly with your financial and tax advisors.