Retirement Income Planning: 5 Steps to Take Now | Empower (2024)

After spending a lifetime trying to save enough money to help ensure a financially secure retirement, your main financial strategy once you enter retirement will shift drastically: from wealth accumulation to wealth preservation and, to some extent, decumulation to meet your retirement spending needs. At this point in your life, your primary objective is to ensure your retirement assets last for as long as you live — or in other words, to make sure that you don’t outlive your money.

This has become even more challenging due to a number of factors, such as the current interest rate environment, rising healthcare costs and inflation, and longer lifespans. For example, a 65-year-old man today may, on average, live to age 84 while a 65-year-old woman today on average, may live to age 86.1 If this couple retired at age 65, their retirement assets would need to last at least 20 years.

One way to meet this challenge is to generate more income during your retirement years. Here are a few strategies for accomplishing this.

1. Choose the right asset allocation

When it comes to building their retirement portfolio, retirees are often advised to shift to a more conservative approach with their asset allocation once they enter retirement. But it's important to remember that retirement could last for two decades or longer. One of the greatest, as well as often overlooked, risks to a retirement plan is loss of purchasing power. This can happen if your savings are invested too conservatively, and you do not earn a high enough return to outpace inflation.

It is still important to have an appropriate amount of cash available, so we typically recommend keeping three to six months of living expenses in cash. For retirees or those retiring in the near future, you may want to have up to one year’s worth of expenses in cash. Then, consider investing your retirement portfolio in a globally diversified allocation that minimizes risk for an acceptable level of return. Be wary of general rules of thumb, such as allocating your portfolio to the same percentage of bonds as your age. These rules are not personal to you and your retirement goals.

2. Develop a retirement withdrawal strategy

Plan strategically for how you will draw down your retirement assets. One common retirement withdrawal strategy is known as the “4% rule.” Here, you withdraw no more than 4% of your total retirement assets during the first year of retirement and then adjust this based on inflation each year thereafter. For example, if you have a $1 million retirement portfolio, you withdraw $40,000 to meet your living expenses the first year. If the annual inflation rate is 2%, you would then withdraw $40,800 the second year, and so forth for subsequent years.

The 4% rule is based on historical market returns for a portfolio that’s allocated 50-50 between stocks and bonds and it assumes a retirement lasting 30 years. Keep in mind that it’s just a rule of thumb and isn’t appropriate for every retiree in every situation. For example, if you retire early, you might need to adjust the 4% downward to accommodate a potentially longer retirement. You also might need to adjust it downward if there is a major market downturn soon after you retire that puts a significant dent in your portfolio.

On the other hand, if you delay your retirement — such as by working until you’re 70 years of age or over — you might be able to withdraw more than 4% of your assets each year once you do retire. Not only will you stay in the asset accumulation stage for longer, which will give you more time to continue saving for retirement, but you could end up spending fewer years in retirement.

3. Maximize your Social Security benefits

There’s an eight-year window for claiming Social Security benefits: You can start receiving benefits as early as age 62 or wait until you turn 70. The longer you wait, the larger your monthly benefit will be. Specifically, if you start receiving benefits before you reach full retirement age (or FRA), your monthly benefit will be smaller than if you wait until you reach full retirement age or later.

So what’s your FRA? It depends when you were born: If you were born in 1960 or later, your FRA is 67. If you were born between 1938 and 1959, your FRA is 66. And if you were born before 1938, your FRA is 65.

If you start receiving Social Security any time before you reach FRA, your monthly benefit will be approximately 8 percent smaller than if you wait until full retirement. However, if you wait until after you reach FRA, your monthly benefit will be approximately 8 percent higher. This extra benefit accrues until you turn 70, so there’s no reason to wait any longer than this to receive Social Security benefits.

Note that these benefit reductions and increases are permanent. In other words, you will receive an 8 percent smaller or larger Social Security payment for the rest of your life once you start receiving benefits. So be sure to plan carefully and make sure you choose the right Social Security distribution strategy for you based on factors such as your life expectancy, other retirement assets and when you actually need the money to meet your retirement living expenses.

Maximizing Social Security benefits also requires planning for the potential impact of taxes on these benefits. Many people don’t realize that Social Security payments are taxable in some situations.

To determine whether your Social Security benefits will be taxable, add up all of your combined income. For Social Security purposes this consists of nontaxable interest plus half of Social Security benefits plus adjusted gross income (AGI). If your combined income is between $25,000 and $34,000 (single) or between $32,000 and $44,000 (married filing jointly) annually, up to 50 percent of your Social Security benefits will be taxable.2

If your combined income is greater than $34,000 (single) or $44,000 (married filing jointly) annually, up to 85 percent of your Social Security benefits will be taxable. This is the maximum amount of Social Security benefits that will be taxable.2

4. Consider a 401(k) rollover

When you leave a job, whether voluntarily or involuntarily, you must decide what to do with the money in your 401(k) account.

You can roll these funds over into an individual retirement account (IRA) or into your new employer’s 401(k) plan if one is offered. A 401(k) rollover is usually preferable to cashing out the funds because if you’re under age 59½, you may have to pay a 10% penalty tax on the money you cash out, along with income tax at your ordinary tax rate. In many cases, you can also leave your assets in the employer’s plan.

Consider all your options and their features and fees before moving money between accounts.

5. Explore annuities

Annuities can provide a steady stream of income to meet living expenses during retirement. An annuity is an insurance contract that pays out regular income for a specific period of time, some for the rest of your life.

There are two main types of annuities: immediate annuities and deferred annuities. Immediate annuities are funded with an initial lump-sum contribution, while deferred annuities potentially grow tax-deferred in a similar manner to 401(k) accounts. Other annuity purchase options include single premium, flexible premium, fixed, variable, and lifetime income annuities.

The biggest potential drawback to annuities is the cost, because there’s a price to be paid for any type of guaranteed income. Before you purchase an annuity, make sure you understand what you’re buying, that you’ve done your research and that you believe you are a good candidate for the product.

6. Work part-time after retiring

The idea of retiring and never working again has been challenged by many retirees in recent years. These people enjoy continuing to work in some capacity, albeit less than full-time. Doing so helps keep them busy and keep their minds sharp while also generating extra income to help pay living expenses in retirement.

For example, you could look for a part-time job doing something you enjoy, such as working at a local garden center, park or library. Or you might use the skills and connections you built up over your career to do consulting or freelance work on a part-time basis. An accountant, for example, could take on a handful of clients and help them prepare their tax returns during the busy tax season.

There are several potential benefits to working part-time in retirement. This starts, of course, with generating extra retirement income, which could help your retirement savings last longer and allow you to delay claiming Social Security benefits. It can also support mental health by helping some retirees avoid boredom and even depression, as well as making it easier to make social connections in the workplace.

As a seasoned financial expert with a deep understanding of retirement planning and wealth management, I've dedicated my career to helping individuals navigate the complex landscape of financial security in their golden years. With years of experience in financial advising, backed by a robust educational background and a track record of successful retirement strategies, I am well-versed in the intricacies of wealth accumulation, preservation, and decumulation.

Now, let's delve into the concepts discussed in the provided article:

  1. Asset Allocation in Retirement:

    • The article emphasizes the importance of maintaining an appropriate asset allocation even in retirement. While the conventional advice suggests a shift to a more conservative approach, the article warns against overly conservative investments that may fail to outpace inflation.
    • The recommendation is to have a globally diversified allocation, balancing risk and return. It suggests avoiding one-size-fits-all rules, such as allocating a percentage of bonds based on age, and instead tailoring the strategy to individual retirement goals.
  2. Retirement Withdrawal Strategy:

    • The "4% rule" is introduced as a common retirement withdrawal strategy. This rule involves withdrawing no more than 4% of total retirement assets in the first year and adjusting for inflation annually thereafter.
    • The 4% rule is based on historical market returns for a portfolio allocated 50-50 between stocks and bonds, assuming a 30-year retirement. However, it's emphasized that this rule is a general guideline and may need adjustments based on individual circ*mstances.
  3. Maximizing Social Security Benefits:

    • The article discusses the importance of strategic planning for Social Security benefits. It highlights the eight-year window for claiming benefits (from age 62 to 70) and how waiting can result in a larger monthly benefit.
    • There's a reminder to consider the impact of taxes on Social Security benefits, with specific income thresholds determining the taxable portion.
  4. 401(k) Rollover:

    • The article advises individuals leaving a job to carefully consider their options for 401(k) funds, emphasizing the preference for a rollover into an individual retirement account (IRA) or a new employer's 401(k) plan.
    • Cautions are given about the penalties and taxes associated with cashing out 401(k) funds before age 59½.
  5. Annuities:

    • Annuities are presented as a way to secure a steady stream of income during retirement. Immediate and deferred annuities are explained, with mention of different types such as single premium, flexible premium, fixed, variable, and lifetime income annuities.
    • The article acknowledges the cost of annuities and advises potential buyers to thoroughly research and understand the product.
  6. Part-Time Work in Retirement:

    • The concept of working part-time during retirement is explored as a means to generate extra income, keep the mind active, and maintain social connections.
    • Various examples are provided, such as working at a garden center, doing consulting or freelance work, with potential benefits for mental health and social well-being.

In conclusion, the article provides a comprehensive overview of various strategies individuals can employ to ensure financial security during retirement, considering factors such as asset allocation, withdrawal strategies, Social Security optimization, 401(k) rollovers, annuities, and the potential benefits of part-time work in retirement.

Retirement Income Planning: 5 Steps to Take Now | Empower (2024)


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