When planning for retirement, many people forget to account for the volatility and taxation of their income across all their sources of savings. This can leave you with dramatically lower ‘take home’ retirement income that may fluctuate from month to month, and that may not last a lifetime.
Given the dramatic increases in longevity, considerations for retirement now include the twin objectives of (1) increasing your after-tax income, and (2) making that income predictable, stable, and last a lifetime. We call it making your retirement “spendable” and “dependable”.
Prior to retirement, these objectives may not have been considered, because earned income from wages was reasonably predictable and 100% taxable.
The three major sources of retirement income are:
Non-Qualified Savings (Brokerage Accounts, CDs and Mutual Funds)
Traditionally, the investment strategy for these savings prior to retirement has consisted of a haphazard mix of asset types, followed by a withdrawal or ‘drawdown’ strategy of these assets after retiring. I’ve often pointed out the flaws in this type of strategy – including the taxation of investment earnings (interest, dividends and realized capital gains) every year, and the tax effects whenever selling a security,
In addition, a withdrawal strategy subjects you to considerable income volatility, while exposing you to considerable risk, Additionally, if the market drops significantly (as retirees found out in 2008), you may still be forced to sell assets to meet income needs, even if it may not be a good time to do so.
Qualified Savings (Rollover IRA, 401(k), 403(b), and other employer-sponsored plans)
Typically, since the savings in these accounts are tax-deferred, important benefits can be achieved by lowering your investment expenses and diversifying your investments. Traditionally, most people utilize a drawdown (similar to the above) or a fixed payout strategy. The problem is that this will either leave you with widely fluctuating income, or the risk that the account will run out. Again, there are strategies that can be employed to help you create stable income that lasts a lifetime.
While claiming Social Security may seem like a simple decision, there are actually many options and claiming strategies to consider, particularly if you are divorced, both spouses have worked, and/or you have dependent children. Your first decision involves deciding at what age between 62 and 70 to start receiving benefits. Your benefit is reduced or increased based on whether you claim earlier or later. Married couples can boost their income by coordinating their start dates. Other decisions can get quite intricate; however there is help available as you weigh these benefit options.
Putting it All Together: Most people do not realize the interconnectiveness of planning for retirement. How, where and when you receive retirement income plays a big part. And always keep in mind the 5 Golden Rules of Retirement:
- Lower the fees on your retirement savings
- Defer taxes on all your retirement savings for as long as possible
- Build up Guaranteed Income from your retirement savings over time
- Optimize your Social Security benefits
- Integrate Guaranteed Income from retirement savings with your other income sources
Together, wise decisions across your sources of savings and income will provide both stability and higher after-tax results for your retirement income that can last a lifetime, leaving you free to enjoy retirement.