Creating a Steady Income in Retirement

Chairs sitting behind a dune on the beach, looking over the ocean.

“When should I take social security?” 

“How do I know when I have enough to retire?” 

“When should I make sure I am not carrying too much risk in my portfolio?” 

“What’s the best way to budget for retirement?” 

These questions are very common to people approaching retirement, and all of them are getting at the same idea. How do you make sure your retirement plan has you covered for long term, steady income? 

Many decisions go into creating your retirement plan, and it starts with taking a comprehensive look at how various financial decisions can affect your retirement path. Your retirement planning should also have the flexibility needed to adapt to changing economic conditions and changing personal situations. 

Step One: What Income Is Guaranteed? 

Social security and pension payments are usually the main sources of guaranteed income in retirement. 

There are many strategies for claiming social security that depend on whether you are married, whether you and your spouse are the same age, who will claim first, and if one spouse is a significantly higher earner. 

For social security, the longer you wait to claim the higher your monthly benefit.  The Social Security Administration (SSA) considers the benefit to be “early” if you take it between age 62 and full retirement age (“FRA,” which for most people is between age 66-67, depending on date of birth). If you begin to claim benefits between your FRA and 70, that’s considered “late” filing.

For each year you delay taking social security, you get an 8% increase in the benefit amount. Conversely, claiming early will decrease your benefit amount. 

There are many questions to consider when considering when you should start taking social security. What is your life expectancy? What lifestyle do you want in retirement? What other income will you have in retirement? 

If you have a pension, you’ll likely have the option to take it as a lump sum or as regular income payments. While many choose the lump sum, it is worth looking at your entire financial picture to make sure that’s the best plan for your situation going forward. 

Step Two: Manage Market Volatility In Retirement 

When we are saving for retirement, we are protected from market volatility based on the long term nature of our investments. You aren’t taking money out, so short-term volatility is compensated for by long-term growth. 

However, in retirement that no longer holds true. You are taking money out and so losses incurred from volatile markets have a much greater impact that can be hard to recover from. 

My goal in working with clients who are in or nearing retirement is to create a proactive and dynamic strategy that works for your specific goals. The most important aspect of a retirement strategy is that it inspires confidence and security. 

Tracking your goals and outcomes is important during retirement, so that if changes are needed to the strategy you can work on them proactively, before you get into a financial situation that leaves you scrambling. 

Step Three: Maximize Tax Efficiency 

An efficient tax plan becomes even more important in retirement as you work from a fixed income. Taxes are always subject to change, so it’s important to work on a plan with a professional who is up to date and good at finding ways that you can be most efficient. 

Typically, you have to wait until you are 59 ½ to avoid penalties from withdrawing from your tax-deferred retirement accounts. However, for some retirement plans,  if you retire at age 50 or later, you may be able to take distributions early and avoid the 10% penalty. This might help you delay taking your Social Security benefits.

Using your tax-deferred accounts like your IRA and your 401(k) plan can also help you lower your tax burden over your lifetime. Using these funds now will lower your account balance, which will keep your required minimum distributions (RMDs) lower. 

RMDs begin at age 73. These required distributions can create a large taxable income, meaning you’ll likely pay more taxes on your Social Security and more for Medicare as well. 

Another option is to roll these funds over into a Roth IRA, which allows them to grow tax-free throughout retirement. The funds can then be withdrawn with no tax consequences further down the road. The trade-off is you pay tax early when you convert the funds from pre-tax to Roth accounts. The sweet spot for a Roth conversion is early retirement, before social security and Medicare begin.

Putting It All Together

Creating a steady income in retirement is all about building a plan that can grow and adapt with you as your lifestyle and goals change. You want to create a solid foundation and then review the details annually to ensure that your plan is proactive and continues to serve your goals. If you want help making a plan for retirement, schedule a call with me today! 

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