Retirement Planning for Retirement Income Funds

  • #Retirement Life
  • June 21st, 2019

During your working years, it’s likely that you’ll receive earnings through a standard paycheck and, depending on your industry, occasional bonuses and cash tips. You might also receive additional income from government benefits or child support payments. In each of these examples, the amount of money you receive and the time at which you receive it is usually pre-set and out of your hands.

However, once you enter retirement or are forced into retirement, you stop earning employment income. When that occurs, you’ll need to take more control over when and how you get paid. As you enter or near this period of your life, it’s important to consider your strategy for generating income during retirement so that you have plenty of money to last over your lifetime.

It’s advised that by the time you retire, you should have 10-12 times your current income saved for your nest egg. If your savings don’t meet that goal, there are plenty of different ways you can strategize a retirement revenue.

The main tenets of retirement income planning include saving enough funds, investing in the right mix of stocks, and drawing down savings in a sustainable manner that can last 20-30 years, depending on your retirement age.

Continue reading below to learn more about how to create retirement income and the different retirement income strategies available to you.

How much do I need to save?

The short answer: it depends. The exact number you need to save will be different from person to person. However, a common rule of thumb is to make a goal of replacing around 70% of your annual pre-retirement income. To do so, you can use a wide variety of strategies such as investments, savings, Social Security benefits, and other sources of earnings like part-time work, reverse mortgages, a pension, and rental income.

Considerations you should make when planning retirement income

Your living expenses will likely be different in retirement compared to when you were still working. For example, funds going toward travel and health care may increase but other payments, like your home loan or auto loan, will likely be lower or nonexistent. There’s a good chance that your taxes will be lower in retirement as well. So, take those factors into consideration as you begin your retirement income planning and budgeting for the future.

Another consideration to keep in mind as you budget for your retirement income is your life expectancy. According to data compiled by the Social Security Administration, on average, a man who reaches age 65 has a life expectancy of 84.3 years, but a woman who reaches the same age (65) can expect to live to about 86.7 years. That means that men and women may want to budget for retirement accordingly, as women statistically live longer.

Retirees who are 65 years old today have a one in four chance of living to 90. With these kinds of stats in mind, it follows that your retirement income strategy should be able to cover your expected lifespan. In most cases, if you are retiring at age 65, you’ll need to prepare for at least 20-30 years of expenses.

What should my retirement plan look like?

Your retirement income planning should include three pillars:

  1. Guaranteed income
  2. Potential for growth
  3. Flexibility

Guaranteed income

Guaranteed income can come from a variety of sources and may be allocated toward basic expenses like paying for your utilities, food, and other day-to-day living costs. Below, are a few you might be able to take advantage of as you investigate your retirement income options.

  • Reverse mortgages: For eligible retirees who are 62+ years old, a reverse mortgage may provide a steady source of income in the form of either fixed monthly payments, a lump sum, or a line or credit. As a bonus, your reverse mortgage loan proceeds are not considered a taxable form of income. We’ll go more into detail about this retirement strategy in the next FAQ section.
  • Social Security: For many in retirement, Social Security benefits are a reliable, expected source of income. According to the SSA, in 2019 alone there will be about 64 million retirees who will collect over one trillion dollars in Social Security benefits.
    • The key component with Social Security is when you decide to start taking benefits. You can claim your benefits as soon as you’re eligible at age 62 but if you do, your benefits will be reduced by 30%. If you delay collecting until your full retirement age, which typically ranges from 66-67 years old depending on your birthday, you’ll be able to receive the full benefit amount entitled to you.
    • Note: The average Social Security benefit in 2019 is around $1,461 a month, which is unlikely to be enough funds to cover all of your monthly living expenses.
  • Pensions: Only 14% of workers in the US have pensions or a defined benefit plan but if you have one, you’ll have to decide between receiving a lump sum payout or a stream of income.
  • Annuities: A fixed-income annuity is a contract you make with an insurance company — in return for an initial investment — that guarantees you and your spouse regular payments for the rest of your life and the life of your surviving spouse. You can begin to receive that money immediately or designate a time period to receive payments.
    • There are a variety of income annuities you can consider included fixed, variable, and indexed. Each has its own benefits and drawbacks.
      • Fixed annuities are the least risky but also have smaller returns.
      • Variable annuities are slightly riskier but could end up giving you a larger payout.
      • Indexed annuities are the middle of the road choice: you’ll get a guaranteed minimum payout plus an amount that depends on your stocks’ performance.
    • Note: If you choose to purchase an annuity, you will typically spend a portion of your savings to receive that immediate or deferred income. Therefore, it is prudent to have other funds available to prepare for surprise expenses.
    • In addition, by choosing an annuity you give up the potential for growth of e funds used to purchase the annuity in exchange for a steady income stream. You have the option to pay more for annual increases in payments to help offset inflation, however.

Potential for growth

Investments are a crucial part of your retirement planning. To prepare for your retirement, you should consider a mix of bonds, stocks, and cash that takes into consideration your time horizon, financial situation, and risk tolerance if the market were to experience a downturn.

If you create a portfolio that’s too conservative, you may miss out on potential growth. If your portfolio is too aggressive, you could create a serious vulnerability if there’s a large market downturn.

You have two options when you’re deciding on the best investments for retirement: create your portfolio yourself or hire a financial planner.

The difficulty with a DIY approach is that you need to have a calm outlook and maintain your course even as the markets change. However, you’ll also need to research stocks that match your long-term financial goals.

Managing your investments is not “a set it and forget it” type of deal; actively managing your portfolio and tweaking as needed will be necessary along the way. On top of that, you’ll need to be aware of any taxes and taxable income your investments generate.

The other option is to rely on a financial planner or investment account manager to take care of the details for you. This is a great option for seniors who don’t have comprehensive stock market knowledge or those who simply want an expert opinion — but be sure whoever you hire has your best interest in mind.

Flexible options

One of the most important parts of your financial planning should be focused on diversifying your sources of retirement income. Why? It boils down to this adage: even the best laid (retirement) plans go awry. Say, for example, you receive an unexpected inheritance from a family member, or you suddenly need to spend more of your monthly income on health care costs. If you have built-in flexibility in your retirement portfolio and avoid depending on a singular source, you can adjust to these changes more easily.

Consider this scenario: If you make withdrawals from your investment portfolio of stocks and bonds, those payments don’t necessarily guarantee you income for life. However, you can change how much you take each month — sometimes a little more, sometimes a little less — to balance out differing returns.

On the other hand, if you have income annuities, they won’t have as much growth potential or flexibility, but they do give you guaranteed income.

A healthy mix of steady income sources, stocks with room for growth, and overall flexibility are key principles to keep in mind as you plan out how to comfortably live within your retirement income.

How do I plan out my withdrawals to maximize my income?

Experts typically recommend a 3-4.5% withdrawal rate each year as you begin to draw down your portfolio and savings in retirement — but this will vary based on your particular situation. Consider withdrawing from your retirement savings in a logical order to maximize the life of your proceeds.

For example, you may first want to draw from taxable accounts since withdrawals have the potential to garner lower capital gains and dividend tax rates compared to regular income tax rates. Then, you may want to move on to your tax-free and tax-deferred investment accounts or 401(k). And finally, you’ll want to withdraw from your tax-free accounts like a Roth IRA, if you have one, to give those funds more time to grow. While this is a general guideline, it may make the most sense to meet with a financial advisor to choose the best withdrawal plan that best fits your circumstances as it can be difficult to figure out on your own.

How can I use a reverse mortgage to increase my income stream?

Reverse mortgages allow you to stay in your home and age in place. Curious how a reverse mortgage works? Instead of a traditional mortgage in which you make payments to the lender, a reverse mortgage converts the equity you have built in your house into cash you can use for whatever you wish.

Reverse mortgages and retirement income planning go hand in hand; this form of financing can act as a complement to your other streams of income. Below, we’ve outlined some ways in which a reverse mortgage can benefit your overall retirement income strategy.

Reverse mortgage retirement strategies:

  • Roth IRA conversion: If you’re rolling a pre-tax IRA or 401(k) into a Roth IRA, you can use your reverse mortgage loan proceeds to cover the tax costs in order to have access to tax-free income in the future.
  • Rainy day fund: Funds from a reverse mortgage can be used to cover unexpected expenses.
  • Balance out market volatility: If you have lower returns from your retirement investment portfolio, a reverse mortgage may help to bridge the gaps you have in income month to month.

Takeaways

As you approach retirement, it’s imperative you strategize your income and build a plan that reflects your financial goals. If you would like to learn more about how to bolster your monthly retirement income, GoodLife Reverse Mortgage Specialists are ready to answer your questions and help you start the reverse mortgage application process today.

Author:Joshua Wilson

Joshua Wilson is a Certified Reverse Mortgage Professional (CRMP) and active member of the National Reverse Mortgage Lenders Association. He loves helping Senior Homeowners Live the Good Life in Retirement with the Home Equity Conversion Mortgage.

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