How will you retire? What will you do in retirement? How will you pay for your bills, lifestyle, and vacations? Medical costs? These are all questions that are on people’s minds, and if they aren’t, they should be. We get numerous clients that come through our doors every day that are asking these questions. They have usually done a great job of saving over the years and have many assets accumulated, but no one has really told them how they can actually retire and what their retirement will look like. What accounts they will draw from to replace their income? What account or asset to pull from first. How do they reduce taxes? What happens if their health changes? Should they downsize and even consider moving out of state to a place with a more appropriate cost of living?
When it comes to retirement income planning, there are many things to consider. One is whether you should pull from pre-tax, post-tax, or non-retirement accounts, and depending on which ones you have, which ones you should pull from first. Of course, it depends on many factors, such as income, expenses, account size, & health. 401K’s or IRA accounts will be taxed. If you pull from Roth IRA accounts, there wouldn’t be any taxes to pay, whereas non-retirement accounts, such as bank accounts or brokerage investment accounts, have you pay capital gains on any profit that you may have had.
Let’s dive deeper into this and talk about the Three-Bucket Strategy for retirement:
- FIXED BUCKET – Which sources will pay your monthly bills?
- When you retire, your paychecks stop, so it’s up to you to create that income stream. For most, the fixed portion of their retirement will come from Social Security, which can be taken as early as 62. Unfortunately though, according to Social Security, the average check that Americans received in December 2016 was $1,360.13. Does that seem like a lot? It sure doesn’t, as it’s actually below the current poverty level. Imagine finishing up your career making $50-60K and then have your income cut down by 65-75%. How can you live? Since pension plans are becoming a thing of the past, many Americans are unfortunately reliant on Social Security as their main guaranteed income source.
- One way to increase that fixed or guaranteed income is to delay taking your social security benefits until your FRA (Full Retirement Age). Depending on when someone was born, that could be anywhere from age 65-67. Doing so could increase your benefit by 20-30%, which could help substantially in the long run. However, the average age someone takes their social security is actually 64, mostly because people are forced to, based on financial needs or health issues, forcing them into earlier retirements. If you do decide to start taking Social Security early before your FRA, they will reduce your benefit until you reach that age, if you earn over a certain threshold. Why would you expect to have your cake and eat it too?
- FREEDOM BUCKET – Which sources give you flexibility to do the things you want and compensate for unplanned large expenses?
- For this bucket, we will use the accounts that you saved into during your working years. Company sponsored work plans, such as 401K’s, 403(b)’s, 457’s, or personal retirement plans such as IRA’s, Roth IRA’s, etc. Even non-retirement mutual fund accounts, that you can touch at any time. The idea here is to pull a conservative amount of these investments either on a monthly or annual basis to help supplement the fixed portion of your income, if need be. This could also be the money you pull to take that dream vacation you’ve always wanted to, or to have to make that needed roof repair.
- FINISH WELL BUCKET – Which sources will pay for advanced medical costs, the effects of inflation over 30 years and any legacy goals that you have?
- For those that are fortunate enough to have adequate retirement assets to go around, we can structure a bucket that is geared for later in their lives, such as their 70’s and 80’s or longer. This would allow for the accounts to grow for possibly 10-20 years longer from the start of their retirement so that there are more funds there, when their health possibly changes. There are unique strategies available that can help clients lock in their gains over the course of their time in the investment, and then we start turning the income faucet on at age 75, when the withdrawal rate is more favorable. These guaranteed income streams help to supplement any rising healthcare costs, inflation, legacy needs, etc.
- Some clients are in a very favorable situation where they literally will not need to ever touch a portion of their retirement assets and have a desire to leave that as a legacy for their children, grandchildren, favorite charity, church, cause, etc. We can help them coordinate the best way, to possibly even leave those funds in a tax-favored manner.
Action items for today:
- Review your own retirement accounts to see if you are saving enough for retirement to meet your needs. There are many retirement calculators online or on your company’s 401K website
- Go on to Social Security’s website, at www.ssa.gov to create a username and password to see what your social security benefits are projecting to be. (They stopped mailing the annual statement about 5 years ago, so it’s good to log in every year to make sure no errors are made on the reporting of your annual income)
- Consult with a trusted financial advisor to help you map out your future and how you will pull together your three buckets mentioned above for the future. For some people that are at a shortfall, there may need to be some planning done earlier on in their lives to help alter that course for the better.
Good luck and let us know your progress!