As you approach your golden years, crafting a comprehensive retirement income plan is crucial to ensure financial security and peace of mind. By implementing the right strategies, you can ensure that your retirement savings are maximized, and a sustainable income stream is created to last throughout your lifetime.
Having helped pre-retiree's and retiree's optimize their finances and retire with confidence (see results) this article will go through the retirement planning process I use with clients.
In this article we will cover the full range of planning considerations including how to maximize social security benefits, optimizing your personal or workplace retirement plans, selecting between different investment strategies, and how to estimate what your sustainable withdrawal rate would be.
To round out our discussion on creating an effective retirement income plan, we will address managing risks during retirement along with strategies for mitigating inflation, longevity, and sequence-of-returns risks. Finally, we will touch upon tax-efficient withdrawal methods essential for minimizing taxes during distribution phases from various account types.
If you want to learn more about our retirement income planning process, check out my free training here.
The first step in crafting your ideal income plan for retirement is to understand and maximize your "guaranteed income" sources.
For almost all of us, our main source of guaranteed income will be Social Security benefits.
Because SS income will comprise the largest proportion of most Americans guaranteed income in retirement, deciding when to claim Social Security benefits will likely have the most impact on your overall financial stability in retirement.
Delaying Social Security can be thought of as purchasing insurance on your retirement. Because delaying increases your paid out benefit, you will increase a guaranteed source of income and therefore reduce your reliance on investment assets for income in retirement. Please reference this research from Professor Wade Pfau if you'd like more details on the pro's and con's of delaying vs early claiming.
Admittedly, there are many variables to consider before determining a claiming age - health circumstances, portfolio value, other sources of retirement income...
A Certified Financial Planner professional can help guide you in evaluating the right claiming age, as well as what estimates to use when building your retirement plan.
Key Takeaway:
Delaying claiming, filing a restricted application, and taking advantage of survivor benefits can maximize monthly payments. The decision about when to claim impacts a predictable source of guaranteed, inflation protected income, it is crucial to carefully evaluate the decision with the help of a professional.
Workplace retirement plans (such as pensions, 401(k)'s, 403(b)'s, 457's, TSP's etc.) and personal savings will be the income source you will tap in order to fill "the gap" in spending that guaranteed sources of retirement income do not fund.
Each workplace plan should be considered in light of how income will be distributed from that plan.
In addition to participating in workplace retirement programs, do not overlook the value of contributing to an Individual Retirement Account (IRA) or other personal savings vehicles. This can help supplement any gaps left by Social Security benefits and workplace pensions while providing additional flexibility in terms of investment decisions and withdrawal options.
There are two main types of IRAs:
If you're uncertain about how to divide up your funds between job-related plans, IRAs, or other individual accounts, we can help you craft an investment plan tailored to your personal requirements and objectives. Even if you are only a few years from your goal retirement age, a well designed investment plan can have a large impact on your odds of retirement success.
Key Takeaway:
Carefully consider the role of workplace retirement plans and personal savings in your overall financial strategy. They will help supplement gaps left by Social Security benefits and provide investment and withdrawal flexibility.
As you draw nearer to retirement, your investment objectives shift from a focus on growth, to a more complex strategy focused on income generation and capital preservation. This change helps preserves your investment portfolio and mitigate risks associated with market fluctuations.
Balancing Risk and Reward in Your Investment Portfolio
To achieve the desired balance between risk and reward, diversifying across asset classes such as stocks, bonds, real estate, and cash is required. Diversification reduces the impact of any single investment decision on your overall portfolio performance while still providing opportunities for growth. As you near age 65 or full retirement age, work with a qualified, fee only, fiduciary financial advisor to help craft an investment portfolio suitable for your spending needs and risk tolerance. They will help you:
Key Takeaway:
As retirement approaches, adjust your investment strategy towards more conservative options to preserve your wealth and provide an additional income source. For more guidance on how to approach this, watch my free retirement planning training video here.
A confident, secure retirement plan is one in which retirees can take income from assets without jeopardizing long-term financial security. In layman's terms - you want your money to outlive you, rather than the other way around!
Annuities are insurance products designed to provide guaranteed lifetime income streams.
In most cases, annuities are significantly more expensive than other investment alternatives.
However, in the right circumstances they can be a good fit for very conservative, risk averse investors who are looking for a high degree of certainty regarding their retirement income.
The tradeoff with an annuity is that, while you get the guaranteed stream of income, in most cases there will be no assets left over for your heirs as that is the price you pay for the certainty.
There are various types of annuities available, each with their own unique features and benefits. Some common types include:
Because annuity sales persons receive commission based compensation, they cannot operate as a fiduciary on your behalf. That being the case, it is EXTREMELY important to consult with a qualified, fee only, fiduciary financial advisor (who does not receive commission based compensation) when determining how to incorporate annuities into your retirement income plan.
Key Takeaway:
Your sustainable withdrawal rate will be dictated by the gap between your spending needs and guaranteed sources of income in retirement. Annuities can be a useful, albeit costly, method of increasing your guaranteed lifetime income stream while mitigating longevity risk. Because of the predatory way many annuities are sold, it's important to work with an experienced financial professional when making these decisions.
Americans are woefully underprepared for retirement. It's estimated that more than half of American's do not have sufficient savings to meet their retirement spending needs... But too often consumers chase investment returns hoping that will bring them greater retirement security, when in actuality it dramatically increases the risk they are exposed to.
You cannot make up for bad savings habits by hoping for miracle investment returns. That being the said, this section on risk management is geared towards those who have adequately (or very nearly adequately) saved for retirement.
Market risks, such as fluctuations in stock prices or interest rates, can significantly affect the value of your retirement savings.
It's important to start planning early and set realistic retirement goals based on your current income and financial goals. Keep in mind that the full retirement age, as defined by the Social Security Administration, is age 65, but you may choose to retire earlier or later depending on your personal circumstances. The earlier you begin planning, the more room you will have to craft a comfortable and secure retirement.
Click here to learn more about working together to build a comprehensive financial plan for your retirement.
Your social security benefit will form the base of your retirement income "pyramid". As such, the dollar amount you receive will influence your investment and risk management strategies. Create a Social Security account online and stay up to date with your changing social security benefit estimate.
Key Takeaway:
Understand market risks and diversify your investment portfolio. The best strategy to manage inflation, longevity, and sequence of returns risks is to work with a qualified, fee only, fiduciary financial planner who can advise you each step of the way. At Peak Financial Planning, we are fee only, fiduciary certified financial planner professionals and portfolio managers. You can click here to schedule a free no obligation consultation to learn more about working with us for your retirement planning needs.
With guaranteed income sources established, and investment strategies in place, it's time to turn to tax planning. Proper tax planning extends the lifespan of your retirement portfolio allowing you to keep more of your saved money by giving less to the government.
Tax planning refers to the order and type of accounts from which you withdraw your retirement income. By understanding how different assets are taxed, retirees can position their assets in the optimal accounts so that in retirement they can draw an income from their investments in the most tax efficient manner.
Crafting a contribution strategy that leads to the optimal distribution strategy is one of the pillars of effective retirement planning. At Peak Financial Planning, we help pre-retirees understand, craft, and implement their optimal contribution and distribution strategy. If you'd like to learn more about working with us to implement this type of strategy, you can click here to schedule a free no obligation consultation.
Key Takeaway:
To minimize taxes in retirement, it's important to have a tax-efficient contribution and withdrawal strategy in place. This process is best done with the partnership of an experienced financial professional.
Retirement planning is like navigating an unexplored mountain. Your financial journey is unique to you and you alone - which makes it hard to know where to begin, what research to do, and who to trust. The vast majority of us wouldn't climb Mount Everest without a guide - so why are we trying to navigate our retirement plan without a guide? Tax advisors, CPAs, financial planners, and investment managers are those guides in the financial universe.
As stated many times in this article, we clearly recommend everyone work with a qualified, fee only, fiduciary financial advisor. For more information on finding a qualified, trustworthy professional, you can read a full guide we have written on this exact subject here.
Benefits of Working with a Certified Financial Planner professional (CFP) or Investment Advisor
At Peak Financial Planning, we are Certified Financial Planner professionals, RICP holders, and fee only fiduciary financial planners and investment managers that work in your best interest. If you'd like to learn more or speak to us about our services, you can set up a free consultation here.
Key Takeaway:
Partnering with a certified financial planner (CFP) or investment advisor can provide expertise, a holistic approach to retirement income planning, ongoing support and fiduciary responsibility. When choosing the right professional for your needs, ask about their experience working with clients in similar situations, fee structure, references from other clients and relevant certifications and licenses.
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Planning for retirement can be overwhelming, but understanding the different strategies and options available can help you create a solid retirement income plan.
It's important to start planning early so that you can make informed decisions about your finances as you approach retirement age. Creating a retirement plan that fits your individual needs and ensures financial security requires thoughtful planning and expert advice. Remember that every individual's situation is different; therefore it's worth investing the time, effort, and money to craft a comprehensive, individually tailored financial plan.
If you're still not sure what to do, we recommend watching our video guide going through our proprietary retirement income planning process here. We specialize in working with individuals just like you to craft the retirement plan that has you feeling safe, stable, comfortable, and confident that you'll only ever need to retire once.
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The three key components of a successful retirement income plan include: 1) diversifying sources of income, such as Social Security benefits, workplace retirement plans, and personal investments; 2) managing essential and discretionary expenses effectively; and 3) implementing tax-efficient withdrawal strategies. A well-rounded approach ensures financial stability during retirement.
A retirement income plan is a comprehensive strategy designed to provide individuals with steady cash flow throughout their retired years. It takes into account various factors like projected living expenses, investment returns, inflation rates, taxes, and government benefits to create an effective roadmap for achieving financial goals in the post-work phase of life.
The four pillars of retirement income consist of: 1) Social Security; 2) employer-sponsored pension or defined contribution plans, such as a 401(k); 3) personal savings accounts like IRAs or taxable brokerage accounts; and 4) other sources, including part-time work or rental property revenue.
This question is best addressed on a case by case basis. You will have specific income needs, starting assets, and health expectations. Those must be factored in when calculating what level of wealth you will need to support your retirement. If you'd like to learn more about the considerations that go into answering this question, you can watch a video guide we have on this subject here.
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