Four: Uncover Potential Income Gaps
The Value of Income Planning process is designed to help you determine whether your stable and dependable sources of retirement income like Social Security or a pension will cover your essential expenses in retirement.
If you discover you do not have sufficient guaranteed income to cover your essential expenses, you will have identified a retirement income gap. Luckily, making this discovery is the first step toward developing a tailored solution toward the retirement lifestyle you hope to experience.
Establish A Withdrawal Plan And Strategy
When it comes to withdrawing money from your accounts, there are a variety of withdrawal strategies to consider.
Regardless of the approach you choose, you may want to match specific income sources to certain types of expenses. For example, you can target income from reliable sources such as Social Security, a lifetime annuity, pension income and required distributions from IRAs or workplace savings to cover essential living expenses like healthcare, food, housing and taxes.
At least 80 percent, and ideally 100 percent, of essential expenses should be covered by predictable retirement income sources such as these. That gives you the freedom to use your traditional investment-oriented portfolio to cover discretionary income needs, such as travel, entertainment or a major, life-enhancing expense.
Remember that taxes are an additional consideration. Its important to budget for taxes that will be deducted from your income as you plan your retirement income strategy.
Consider Rolling Over Your Savings To A Roth Ira
If youre investing in a 401 or an individual retirement account , earnings on your withdrawals will be taxed. And once you reach age 70.5, you must begin taking required minimum distributions from your IRA.
But you can also convert to a Roth IRA. These retirement savings vehicles are funded with your after-tax dollars, so they wont reduce your taxable income as traditional IRAs and 401s do. But withdrawals you make after age 59.5 will be tax free as long as youve had the account open for at least five years.
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Estimate Your Retirement Expenses
Theres no way to figure out how much youll need to save for retirement until you figure out how much youll be spending. Guides like this one and replacement ratio calculators will help you come up with an actual number by taking into consideration such truisms as estimate high, dont forget taxes, and take into consideration inflation.
Annuities In A Modern Financial Strategy For A Better Retirement
Are you looking for a way to ensure that you have a comfortable retirement? If so, you may want to consider adding annuities to your financial strategy. Annuities can play an essential role in ensuring that you have the money you need when you retire. This guide will discuss how annuities can help improve your
Understanding The Tradeoffs As You Build Your Income Strategy
Everyone’s situation is unique, so theres no one income strategy that will work for all investors. You’ll need to determine the relative importance of growth potential, guarantees, or flexibility to help you pinpoint the strategy that is right for you in retirement. Of course, there are tradeoffs. For instance, more growth potential can mean settling for less guaranteed income. With more guarantees, you get less growth potential and less flexibility. If you have an employer stock plan then there are the risks of concentrated positions to compare against the benefits of potential long-term incentives. Consider, too, your family’s history regarding longevity and whether you plan to leave a legacy to your heirs.
How Much Money Will You Need For Retirement
In short, a lot probably more than youre expecting.
As we saw above, many factors affect how much youll ultimately need to save for retirement, such as your retirement goals, expected living expenses, and your retirement age. For now, if you want to get a rough estimate for your retirement planning, you can use the following methods.
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How Much Do You Need To Save For Retirement
One of the hardest parts about preparing for retirement is thinking about life as a 70-something. A lot of people get so overwhelmed about saving for an unknown future, that they end up not saving anything at all. Thankfully, planning for retirement is not overly onerous, but you will need a road map one that can evolve over time to keep you on track.
The first place to start is to think about what your life might look like in retirement. Sit down with a pen and paper and write down your retirement goals.
Then think about how much everything will cost. We don’t know what prices will be like in the future, and in recent years inflation has run below the Fed’s benchmark of 2%, but the average inflation rate in the U.S. over the past century was 3.22%. So plan for higher prices in the decades ahead. You’ll also want to factor in your day-to-day expenses, like housing costs, food and health care. Remember, some of the costly expenses you have now, such as a mortgage or childcare costs, will no longer exist, which could result in a decrease in your overall expenses as you near retirement.
Next, add up all the income you might receive in your post-working years. Factor in pension income if you have one, social security payments and any other dollars, such as rental income from a property, that may come your way. Match up revenue and expenses and you’ll get a good idea of what you’ll need to set aside for every year of your retirement.
Taxable Sources Of Retirement Income
Expect these types of retirement income to be taxable at your ordinary income tax rates:
- Withdrawals from retirement plans: A plan funded with pretax dollars, whether by you or your employer, will result in taxable retirement income when withdrawn. Expect withdrawals from traditional IRAs, 401s, 403s, SEPs, and other similar types of plans to be taxable.
The 10% penalty on early withdrawal from IRAs was suspended for 2020 by the CARES Act. It also allowed for the income from any withdrawal to be spread out over three years to reduce the tax hit. The CARES Act also allows taxpayers to file for recovery of taxes paid if the withdrawals are repaid within three years.
- Pension income: Most pensions are taxable. Some types of military pensions or disability pensions may be partially or entirely tax-free. Your pension provider will send you a 1099 form at the start of each year that shows you how much of your pension is taxable. If you paid part of the cost of your pension, you can exclude part of each payment from your income.
- Investment income in non-retirement accounts: Dividends that occur in non-retirement accounts will be reported to you on a 1099-DIV form. Capital gains and interest will come on a form 1099-B each year. You will pay tax on most of this type of investment income as it is earned. The exception would be any capital gains that fall into the 0% tax rate. You won’t pay tax on that portion of capital gains.
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Could Retirement Be A Thing Of The Past
Its not difficult to locate news articles that predict some variation of Retirement As We Know It Is Over. Its certainly true that times have changed since dad might work for GE for 30 years and kick back earning his full salary for his remaining days. A recent survey of American workers conducted by the American Institute for Economic Research found that 82% of respondents 50 and older planned to keep working past the age of 65.
“The days of the gold-watch retirement where we have an office party and maybe some punch and cookies and never work again are more mythical than a reality,” – Catherine Collinson, President of the Transamerica Center for Retirement Studies
She went on to say that few workers envision that type of retirement and many plan to keep on working part-time even after they retire. It even raises the question is retirement the right word.
Do folks just love working so much theyre compelled to do it until their dying day? Not at all. Were just too broke to stop. According to a recent study, a full third of Baby Boomers, the generation closest to retirement age, have less than $25,000 in retirement savings, and more than 20% have nothing set aside at all. Even if you have significant savings going into retirement, you may still be concerned about how long it will last.
Choose The Right Investment Provider
Now you know how much to save and what accounts to use. Next choose the best investment provider to hold your precious retirement savings. Seeking professional help with your finances can be a scary experience, a bit like taking your car to an unfamiliar garage for repairs. To choose the right investment provider, understand what’s important to you, do some online research, check that your money is insured and know what you’re paying in fees.
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Selling Your Current Home And Buying A Less Expensive One
Selling your home and buying a less expensive one can provide you with extra money in retirement. This is often called downsizing.
You may save money in rent or mortgage payments, or free up some of the money that is invested in your home, by moving into a less expensive home. You may also pay less for utilities such as heating and electricity. However, remember that there are many fees and costs associated with buying and selling a home.
Rrsp Funds And Bankruptcy
RRSPs do have one major advantage over TFSAsin the event that you become one of the hundreds of thousands of Canadians who declare bankruptcy every year, your creditors will not be able to garnish RRSP funds thanks to Canadas Bankruptcy and Insolvency Act.
TFSAs are more easily garnished. Granted, as this informative article on the topic points out, very few people who reach the bankruptcy have any funds left in their TFSAs to garnish. Seizing assets may not be quite so cut and dried, however. This article, How to protect your retirement funds from , explains that in some cases, depending on the province in which they reside, freelancers may be somewhat more vulnerable to seizure of RRSP funds.
Since your RRSP account may be your single largest asset, or your second largest if you’re a homeowner, you may find yourself tempted to use it as collateral on a loan. Think twice about this. Financial consultant and author Talbot Stevens told the The Globe and Mail that while using RRSP funds as collateral on a personal loan is technically possible, its highly discouraged for the major bill youd have to pay at tax time.
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Your Spouses Social Security
Show the amount starting in the year/age your spouse will begin benefits and continue it through their life expectancy. If there is an age or health difference between the two of you keep in mind that upon the first death, the surviving spouse keeps the larger of their own Social Security or their spouse’s. This means if one spouse has a shorter life expectancy, your retirement income timeline would only include the larger Social Security amount after the expected longevity of the other spouse had been reached.
Old Age Security Pension
The Old Age Security pension is a monthly benefit for Canadians who are 65 or older. You can get OAS benefits even if you’re still working or have never worked.
You dont need to contribute to the OAS pension in order to benefit from it. You can start to receive OAS at age 65 or choose to defer for up to 5 years. For every month you delay receiving your OAS pension, the higher the monthly payment will be.
Youll typically be eligible for the OAS pension if you are a Canadian citizen or legal resident and have lived in Canada for at least 10 years. The amount you will get from the OAS pension depends on how long you lived in Canada after the age of 18. You will typically be eligible for the maximum amount if you lived in Canada for 40 years or more.
You may be selected for auto enrolment in the OAS pension. This means that you wont have to apply to start receiving your OAS pension. You will receive a letter a month after you turn 64 years old telling you if you are chosen for auto enrolment in the OAS pension. You can still defer receiving your OAS pension if you are eligible for auto enrolment.
If you dont get a letter telling you that you are eliglble for auto enrolment then you will have to apply for the OAS in writing by completing and mailing in the application form.
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Experts Recommend A Monthly Retirement Income Of Around 80% Of Your Pre
A key part of retirement planning includes building a nest egg to help pay for expenses and fund your lifestyle once you leave the workforce. Estimating your retirement income can help you know how much you need to save in order to live comfortably, getting you closer to your long-term financial goals.
However, knowing how much you need to retire can depend on several different factors, and it’s different for everyone. In this article, we will review the average retirement income in 2021 , talk about what a good retirement income is, and offer information on retirement income sources and how to best save for retirement.
What Are The Stages Of Retirement Income Planning
People start their retirement income planning at different stages in life depending on a variety of reasons. No matter your age, or what stage in life you are, now is always the best time to start planning. Typically we break the stages of retirement planning into three different stages.
At this stage, you may not have a lot of money to invest, but you do have time to let your investments mature, which is a massive advantage. Compound interest allows you to earn interest, and the more time you have, the more you earn. Even if you can only set aside $50 a monthly, it will be worth three times more at retirement if you invest it at age 25 versus age 45.
Youll achieve your peak earning potential during this stage of life. You should be taking advantage of any 401 matching programs offered by your employer. Looking at life insurance and disability insurance is important as well. You want to make sure your family can survive financially without pulling from retirement savings if something happens to you.
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Where Does Retirement Income Come From
Many people have various sources of retirement income. These can include investment accounts to protect against inflation, benefits from government programs or continuing paychecks. Generally speaking, its best to have several of these income sources to ensure you have enough to live comfortably.
When considering where your retirement income will come from, one important aspect to think about is the diversification of your portfolio. This can help to alleviate risks in the market and protect your future or current income.
How To Safely Establish Forever Retirement Paychecks
Maybe youre a little like me.
In the home stretch of your career.
Youve worked hard for decades. Climbed the corporate or business ladder, or simply found a decent job and showed up every morning ready to work. Day in, day out. Week after week. Month after month. Year after year. Decade after decade.
Now, youre in your late 50s or early 60s, and its starting to hit you.
Its almost time.
If youve been fortunate, privileged, frugal, or some combination of those, in a few years, youll be able to retire.
And thats when it hits you.
No more paychecks. No more client payments. Instead, youll have to establish your own paychecks, funded by your portfolio and other retirement income sources.
Are you getting a bit queasy at the thought of having to start drawing down your portfolio to generate retirement income, when youve spent decades building it up?
No worries. Thats what were here for today.
In this article, we discuss retirement income planning and share ideas to help you create your own forever retirement paychecks from multiple sources of income to ensure you can enjoy a comfortable retirement.
With this article as a guide and as you begin to consider how these concepts apply to your own situation, youll be on a clear path to create your own retirement income plan with forever retirement paychecks that will last a lifetime.
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Be Flexible And Refine Your Income Plan Over Time
You want to have a plan that can adapt to life’s inevitable curveballs. Five years into your retirement, you might receive an inheritance, have your parents move in, or experience another significant life event. When these things happen, you need a plan that gives you the ability to make adjustments along the way.
That’s why it’s important to combine income from multiple sources to create a diversified income stream in retirement. Complementary income sources can work together to help reduce the effects of some important key risks, such as inflation, longevity, and market volatility.
For example, taking withdrawals from your investment portfolio gives you the flexibility to change the amount you withdraw each month, but does not guarantee income for life. On the other hand, income annuities provide guaranteed income for life, but may not offer as much flexibility or income growth potential.
Tip: Flexibility may also be important when you begin to take required minimum distributions once you reach age 72. If you’re planning to spend your RMDs to cover your ongoing retirement expenses, you may want to work with an advisor to determine tax-efficient ways to take those withdrawals, year after year.
A note on principal preservationAs part of your overall financial plan, you may also wish to preserve some principal for use in an emergency or to leave a legacy for heirs. You can accomplish this separately from, or in conjunction with, a diversified income plan.