While saving and investing are certainly big parts of planning a successful retirement, the reality is that retirees live on income, not assets. With that in mind, is your income strategy on the right track?
If not, there are some retirement income strategies that you could consider.
The Key Components of a Retirement Income Plan
To retire comfortably, you will have to evaluate your expenses, as well as the income sources that you’ll have available to you in the future. Some other parameters can dictate how and when you implement your retirement income plan. These can include your:
- Time frame until retirement
- Risk tolerance
- Marital status
- Anticipated life expectancy
Although some financial advisors believe you can live on 70% or 80% of your pre-retirement earnings in the future, this is not necessarily the case. In fact, depending on how you plan to spend your retirement, it is possible that your expenses may be more than they are now.
Given that, it is important to create a retirement budget that outlines your essential and your non-essential expenses. For example, essential costs will typically include the following:
- Utilities (electric, natural gas, water, sewer, trash)
- Transportation and fuel
- Healthcare and prescriptions
Non-essential expenses may encompass some or all of the following items:
- Property and/or vehicles (such as a second home, RV, boat, etc.)
- Dining out
Once you have added up your estimated expenses, you should determine where your retirement income will be generated from, as well as project the amount(s) from each. Typically, retirees generate income from more than just one source. These could include:
- Employer-sponsored pension plan
- Social Security
- Interest / Dividends from personal savings or investments
- Reverse mortgage
- Rental property income
After you have added up the total amount of your estimated expenses, as well as the total amount of monthly income being generated, you will be able to determine whether there will be enough, or alternatively, if there will be an income “gap.”
If it appears that your future costs will exceed your estimated income, you may need to revise your retirement income plan. There are several options for doing so, such as:
- Working for a longer period of time (which can help to increase the amount of money you have saved, as well as the amount you could generate from Social Security)
- Reduce your expenses (such as doing away with some or all of the non-essential items)
Other Items to Consider with Your Retirement Income Strategy
There are some other important items to consider when it comes to your retirement income strategy. For instance, today’s life expectancy is longer than it was in the past. This means that your retirement income must last for a longer period of time.
Because of this, not only can you require income to keep paying out, but you must also ensure that you have protected this income from various risks, such as:
- Stock market volatility
- Low interest rates
- Sequence (or order) or returns risk
One of the biggest risks to your retirement income – and to your retirement lifestyle – is longevity. In fact, because people are living longer now, you can face more financial risks. One of the biggest fears on the minds of many retirees is that of running out of income while it is still needed.
There are, however, some financial tools that can help you to alleviate this fear. One such option is an annuity. These financial vehicles are designed for paying out income for a specified period of time, such as ten or twenty years, or even for the remainder of your lifetime – regardless of how long that may be.
Is Your Retirement Income Strategy on the Right Track?
There are many components that need to be addressed when it comes to creating a good, solid retirement income strategy. Because of this, it is recommended that you discuss your specific short- and long-term financial objectives with a retirement income specialist who can offer you suggestions and strategies.