After saving for years, it's time to start using your retirement savings. Income planning is one strategy to ensure your hard-earned savings last through your entire retirement.
To create a retirement income plan, you start with an estimate of your expenses for each year of your retirement. Then, you examine all your retirement accounts and income sources to decide where the income for that year will come from. Keep reading to learn valuable information about income planning in retirement.
Realize That Your Annual Expenses Will Fluctuate
To calculate your retirement savings goal, you most likely used a specific income goal for your retirement and multiplied this number by the length of time you plan to be retired. While this is an acceptable way to generate a semi-realistic savings goal, you need to be a little more exact with your expenses once you're in retirement.
It's unlikely that your expenses will remain the exact same every single year for your whole retirement. Some years you may incur large, one-time expenses. Here are some items that can significantly impact your annual expenses:
- Home renovations
- Vacations
- Medical expenses
- Vehicle expenses
- Property purchases
Though you can't predict the future, it's important to spend time envisioning how you want to spend your retirement to get a more accurate idea of your expenses. Don't just assume you'll spend $60,000; instead, specify in your budget the expenses that the $60,000 will actually pay for.
Consider a Dynamic Withdrawal Strategy
One guideline for retirees states that they should withdrawal no more than 4 percent of their retirement savings (plus inflation as they progress through retirement) to avoid running out of money. While this guideline works for some retirees, you might consider a dynamic withdrawal strategy for your nest egg.
A dynamic withdrawal strategy means that you adjust your withdrawals based on the performance of your investments and your estimated expenses. If you've had a year with high investment returns, you might withdraw more money than if your investments performed poorly.
Even if you don't need the money for your current expenses, you can put it in some type of easily accessible account with minimal risk (like a CD or savings account) to use as needed for future expenses. In years where the stock market is down and you want to minimize how much you withdraw, you can tap your savings to help cover your expenses.
Remember to Account for Taxes
One mistake that some retirees make when income planning is that they forget they may have to pay taxes on some of their retirement income or retirement withdrawals. This tax obligation will fluctuate depending on the source of your retirement income.
Generally, taxable investment accounts (like a standard brokerage account) and tax-deferred accounts (like a 401(k) or traditional IRA) are the first investments you should withdraw from. Taxable investment accounts are taxed at the capital gains rate if you've held the investment for more than a year. There are no age restrictions regarding withdrawals from these accounts.
With tax-deferred accounts, you'll pay a penalty if you access the money before you turn 59.5. For many people, their regular income tax rate is higher than the capital gains rate. You must start taking a required minimum distribution from these tax-deferred accounts by the time you're 70.5.
Many retirees over 59.5 with taxable and tax-deferred accounts benefit from having a tax expert assist with deciding how much they should withdraw from each account. Leave Roth accounts (like Roth 401(k) and Roth IRA accounts) untouched for as long as possible. Your money will continue to grow, and when you do make withdrawals, they will be completely tax-free.
Need assistance in making an income plan for your retirement? Contact Presidio Wealth Management to schedule an appointment.