Income management during retirement

Managing your income is always important, but it becomes even more important in retirement when your income comes from your savings, not wages and income. Because your source of income – which you saved so carefully while you were working – is limited in retirement, you need to make sure it will last the rest of your life. This means determining your income needs in the years leading up to retirement and, once you retire, managing your retirement assets efficiently. In this article, we'll look at some points to consider when doing these things.

Planning in pre-retirement years

As the time for retirement approaches, there is always the possibility that the amount you were sufficient to fund your retirement year will not be enough. Reasons can include cost-of-living increases and unexpectedly low investment returns. To improve your chance of a financially secure retirement, periodically reassess your retirement income and sources over the last 10 years before your expected retirement date.

"We believe it's extremely valuable to reassess your retirement income needs annually in the 10 years leading up to retirement," says Patrick A. Strubbe, founder and owner of Preservation Specialists, LLC, in Columbia, South Carolina. and author of Save Your Retirement! "This is due to a number of factors. First, your financial situation and nest egg are constantly changing. Second, your dreams and desires may change or fluctuate (you may have decided that you don't want to wait 10 years to retire!). Finally, it's good to make adjustments based on what's happening around you – taking into account inflation, interest rates and the general economic environment, among other factors. "

The performance of the stock market in the decade between 1999 and 2009 is a good example of how potential retirees have had to reevaluate their retirement plans. For many, the market boom of the early 1990s raised hopes of a financially secure retirement. However, the subsequent market decline led to a significant reduction in retirement savings, which caused many individuals to retire early to postpone their originally anticipated retirement.

What you can do if you do not have enough

If your reevaluation of your retirement portfolio and your current expenses show a shortfall in your savings, you may need to work beyond your expected retirement date. (For more information on assessing how much you need for retirement and how much you have, see Saving for retirement: the quest for success .) Should you decide to continue working or find a job after filing? For Social Security benefits, be aware of how your income might affect the amount you receive if you are less than full retirement age for your birth date, as determined by the Social Security Administration.

Even if you find that you can't retire as soon as you planned and need to keep working, you can try to reduce your extended pre-retirement time by re-strategizing. Basically, you need to increase the amount you save so that you shorten the time to reach your goal. Here are some ways to boost your savings:

• Consider debt consolidation or refinancing to reduce monthly payments on credit cards and other loans, including your mortgage. You can redirect the reduction of interest payments to your retirement egg.
• Make changes that reduce or eliminate spending on luxury items or other things you don't need. It may be easier than you think! Consider using a less expensive car, buying less expensive items and even moving into a smaller or less expensive house or apartment. Although it can be difficult to make these changes, you can be happy that they will increase your standard of living during retirement when you may not want to or be able to work – or get high-paying jobs.

Control of your assets during your retirement

Assessment of your wealth distribution

The recommendation to make your money work for you also applies to your senior years. To achieve this, you need to invest your assets to get a return on investment.

This means it is important to protect your assets during your retirement years when you have less time to recover from market declines. This means you may need to switch from higher risk investments to those with a guaranteed rate of return. However, your reallocation depends on how old you are when you retire and your health condition. Early retirement, especially if you have a longer life expectancy, can be more aggressive investing even during your retirement years. (For more information on asset allocation, see Optimal Asset Allocation and 6 Asset Allocation Strategies That Work .)

"The longevity of your retirement portfolio is very sensitive to returns the first few years of withdrawals, " says Kevin Michels, CFP®, financial planner with Medicus Wealth Planning in Draper, Utah. "Negative returns early on can significantly reduce the longevity of your portfolio. That's why it's important to have an appropriate asset allocation from day one in retirement. "

When reallocating your investments, also consider the resulting liquidity level and how this will affect your ability to make withdrawals when you need them. For example, unlisted or held securities can take from a few weeks to over a year to liquidate. Reallocating your assets without attention to liquidity can leave you cash-strapped, which becomes a particular problem if you need to withdraw your required minimum distribution (RMD) amounts by the applicable deadline (this starts at age 70½ at ) . There have been numerous cases of individuals who could not meet their RMD deadlines because assets could not be liquidated in a timely manner.

Manage your income stream

Your income stream during your retirement years usually depends on your annual expenses, the amount you have saved, and the number of years you need to project.To balance your income with your expenses, do the following:

• Make a list of your monthly expenses, such as z. B. Utilities – including electricity, phone, gas, and water – groceries, rent or property taxes, and transportation costs. Factor in medical and recreational expenses as well. These amounts can change each year due to cost-of-living increases, which means you need to make an assessment at the beginning of each year. Generally, inflation increases 3% per year, but could be higher for certain expenses like medicine and health.
• Get an idea of the amount you have saved for retirement. This includes your regular savings and retirement assets.
• Look at your life expectancy and add additional to make sure your income will last.

Of course, the last two factors together determine how much monthly income you can have while your savings are the last time. Look at how much you have saved vs. the number of years you expect to need it. Suppose you believe this number is 20 years and you owe 500.000 US dollars saved. Your monthly allotment would be approximately $2, 100. Add this amount to the amount you receive from Social Security (and any pension benefits, if you have them). This is what you have as income to cover your monthly expenses. (To estimate your Social Security income, use the benefit calculators on SSA's website.)

Looking at your expenses each year can help you determine if you need to adjust your spending to make sure you're not compromising. Your income in future years. (Note: When determining your income for retirement, also consider your spouse's income as well as your spouse's expenses.)

Your income from your retirement annuities

The amount of income you need Withdrawing from your retirement vehicles generally depends on how much you have available or will receive from other sources, z. B. Of your regular savings and Social Security. If possible, consider not withdrawing more from your retirement account than you are required to each year by IRS regulations. This allows the remaining amount to continue to grow tax-deferred or tax-free in the case of Roth IRAs. This will also help reduce the amount you need to include in your income, which will reduce the taxes you owe for the year. Your income also determines what you have to pay for Medicare Part B.

Once you have determined how much you need / will need to distribute from your retirement account for the year, contact your retirement plan administrator or financial services provider. Distributions from your retirement account. To do this, you request that the distributions be paid to you at a later date and continue at a certain frequency, z. B. Monthly, quarterly, or annually.

When setting up scheduled distributions, make sure the amount you request is enough to meet any RMD. If the amount you withdraw from your retirement account for the year is less than your RMD amount, you owe the IRS a penalty of 50% of the shortfall, called the excess accumulation penalty [see Avoiding Mistakes in Required Minimum Distributions (RMDs)] .By setting scheduled distributions, you can ensure that your RMD is not only distributed in a timely manner, but also that you receive your payments without having to contact your financial institution each month.

Income from retirement vehicles can affect income taxes

When determining your annual expenses and income streams, keep in mind that you will have to pay income taxes on amounts you withdraw from tax-deferred retirement accounts. These amounts are treated as ordinary income for tax purposes.

Withdrawals before 59. Year of life

If you withdraw assets from your retirement account before you reach age 59 ½, the amounts are subject to a 10% excise tax unless you meet one of the following conditions: the exceptions under IRS regulation (see 9 Penalty-Free IRA Withdrawals ). This excise tax is in addition to any income taxes you owe on the amount. If you need to distribute amounts from your retirement account before age 59 ½, talk to your financial planner about strategies to avoid or minimize the excise tax.

The Bottom Line

As with other aspects of financial planning, managing the income you receive during your retirement years requires careful planning. It is important that you do not wait until you retire to make your financial plans. Instead, evaluate your financial status during your pre-retirement years so you can first determine if you need to defer retirement. Most importantly, talk to your financial planner who will be able to determine your specific needs. (Remember that the topics covered in this article are from a general perspective.)