If you are getting ready to retire one of the most important things that you need to understand is how to manage retirement income. At the end of the day retirement is simply making sure you have enough income to cover all of your expenses. In today’s podcast we are going to look at Retirement Income.
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Transcript:
432 Navigating Your Financial Future- A Comprehensive Guide to Managing Retirement Income
Announcer: [00:00:00] Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now, here is your host, Jason Parker.
Jason Parker: America, welcome back to another round of Sound Retirement Radio.
You’re listening to episode number 432, Navigating Your Financial Future. A comprehensive guide to managing retirement income. If there’s one thing that I know about retirement, it’s all about cashflow. It’s making sure you’ve got enough income coming in to cover your expenses. But before we get into today’s episode, let’s start out by renewing our mind.
I’ve got a verse here for us from Colossians chapter two, verses two and three. My goal is that they may be encouraged in heart and united in love, so that they may have the full riches of complete understanding in order that they [00:01:00] may know the mystery of God, namely Christ, in whom are hidden all the treasures of wisdom and knowledge. I went to the aquarium this weekend, but I didn’t stay very long. There’s something fishy about that place. My kids were asking me for money the other day, and I said, my, my wallet’s an onion. And Every time I open it, I cry. If you’re getting ready to retire, one of the most important things that you need to understand is how to manage retirement income at the end of the day.
Retirement is simply making sure you have enough income coming in to cover all of your expenses. In today’s podcast, we’re going to look at retirement income. But before we get into today’s podcast, I’m very excited to announce that the Retirement Budget Calculator Pro version 4. 0 is now available. In the newest version of the calculator, you now have an AI retirement assistant to help answer your questions.
The calculator will help you know if you will run out of money in retirement. The new retirement optimizer feature enables you to run scenarios, [00:02:00] allowing you to quickly overlay your baseline assumptions to see how different decisions will impact your financial plan. The community portal is where smart people gather together to ask one another questions.
The calculator is completely redesigned, making it easier to use, and it includes improved visualizations. Be sure to visit retirementbudgetcalculator. com and check out all the new features. We’ve been working on the newest version of the calculator for almost a year, and I think it is going to knock your socks off.
If you’re already subscribed to the calculator, just log in, and all of your information will automatically migrate over to the new Retirement Budget Calculator Pro version 4. 0. As we dive into the idea of managing retirement income, there are some people who still have guaranteed pension income that will cover all of their financial needs, but most people are going to have to figure out how to take the money that they’ve been saving in their 401ks and IRAs and other accounts to generate the income that they’re going to need in retirement.
The number one concern people have is [00:03:00] retiring too early. only to learn that they have to go back to work at some point because their money did not last as long as they had planned. So in today’s podcast, I want to help you understand exactly how you can come up with a plan for managing retirement income.
We’re going to look at different sources of retirement income, and more importantly, how you can gain the confidence to be able to retire and not have to worry about going back to work at some point in the future. In today’s podcast, I want to introduce you to a former few core concepts that I believe are going to help you unlock the key to managing retirement income.
In order to create a really good income plan, you’re going to need to follow these steps. Number one, start by determining your non negotiable expenses. Before you retire, it’s important to have a clear understanding of your essential living expenses. This includes things like housing costs, utilities, groceries, and health care.
These are the bills that you absolutely cannot live without and you will need to budget for in retirement. By knowing these expenses ahead of time, you can [00:04:00] better plan for how much income you’ll need each month. Number two, start to dream about the extras that you’d like to do in retirement. Dream expenses are usually categorized as discretionary expenses.
Where are the places you’ve always wanted to go? Do you want to buy an RV and travel the country? Will you spend time visiting the kids and grandkids? What are the hobbies you will pursue? How will you spend your time? After compiling a list of these items, add their respective costs and determine the frequency of these additional expenses.
Will your travel happen once per year? Or multiple times per year. Will you travel a bunch in the first 10 years of retirement and then taper down the next 10 years? Or will you be one of those folks that are taking the Polka cruise at age 95? The key to your discretionary expenses is that you need to have some idea for how much this extra stuff is going to cost and how much of it you’re planning to do and how long you’re planning to do it.
Number three, planning for healthcare expenses in retirement. [00:05:00] One major expense that many people overlook in retirement planning is healthcare costs. As we age, our health care needs typically increase, which can lead to higher out of pocket expenses. It’s important to consider these potential costs when creating a retirement spending plan.
One way to think about health care spending is to segment your spending by decades. In early retirement, from 55 to 64, expect higher out of pocket health insurance expenses. Unless, of course, you structure your income in such a way that you can qualify for the ACA credits. For the retirement years, from 65 to 74, that’s when Medicare kicks in.
And many times, this time of life results in decreased insurance expenses, but with increased age, there can be additional healthcare related expenses. Mid retirement is going to be that period from 75 to 84. Chronic conditions become more important during this phase of retirement, and this often leads to an increase in out of pocket medical expenses, as well as higher prescription drug costs.
And then you have your late retirement. This is from age 85 [00:06:00] plus. This is the area where many people experience long term care costs. Things like home care and assisted living and nursing home expenses. And while I hope that none of these things ever happen, it’s good to create a what if scenario in your plan so that you can stress test it to see what impact would that have on you.
Number four, consider multiple streams of income in retirement. Relying solely on one source of retirement income may not be enough to sustain you throughout your golden years. Here’s a list of income sources that many people have in retirement. Number one, of course, is social security. You want to go through a process to optimize that benefit, understand not only how do you get the most income over two people’s lifetime, but which claiming strategy is going to put you in the best financial position over your lifetime.
Number two are pensions. Many people have pensions that work for the federal government, state government, and some corporations. Or part time employment. We’ve seen people that get a part time gig mowing the lawn at the golf course or working at the pro shop or [00:07:00] umpiring, whether it’s Little League Baseball or roughing basketball games to make just a little bit of side income, annuity income.
So this would be where, if you purchase an annuity from an insurance company. Rental income, we see a lot of people that have a rental property or they have a little accessory dwelling unit in ADU on their property that they rent out, or they have a little Airbnb property where they generate some extra income.
Portfolio withdrawals of course is one that most people think of, and this is from your investment and retirement accounts, and this would also include things like dividends and interest income that’s not being reinvested that you’re planning to live on. Of course, I just did a podcast about reverse mortgages.
So a reverse mortgage is another way that people can tap into the equity of their home to help supplement their cashflow. And then in some instances, we P we see people that have purchased life insurance, cash value, life insurance policies, and it may be possible to take withdrawals from those policies or loans from those policies.
I’m not personally a huge fan of that type of planning, but I know [00:08:00] that is one source of income that people are considering. It’s important to recognize that not all of your income is created equally in the eyes of the IRS. For example, 401k withdrawals get taxed as ordinary income. But Social Security has special taxation rules and it’s possible that none of your Social Security is taxable.
But in a worst case scenario, only 85 percent of your Social Security is counted towards taxable income. Understanding that various types of income are subject to distinct tax treatments is one reason many people are considering Roth conversions while the income tax rates are at an all time low. The great advantage of Roth conversions is that they provide you with a pot of money that you fully own.
Unlike an IRA or a 401k, anywhere from 10 to 40 percent of the funds may be owned by the IRS. However, with a Roth conversion, every dollar is truly yours. Even your real estate comes with tax liabilities, not only through ongoing property taxes, but also the potential [00:09:00] taxes on equity when you sell the property in the future.
In contrast, funds in a Roth IRA have already been taxed. While spending from a Roth IRA may be subject to sales tax and other similar taxes, they’re not going to be subject to additional federal income taxes. Once you have a clear understanding of your essential and discretionary expenses, as well as your income streams, you can start to calculate your secure income score.
The way to determine your secure income score is to add up all of the guaranteed income over your lifetime and compare it to your lifetime of essential expenses. If your secure income score is greater than 80 percent and you have sufficient liquid investments, You should feel good knowing that most of your basic expenses are covered by guaranteed income.
If your secure income score is lower than 80 percent, then you may want to consider purchasing an annuity to increase your guaranteed income or reducing your essential expenses. In the Retirement Budget Calculator, we show you your secure income [00:10:00] score on the dashboard. Now that we understand income and expenses, there’s a good chance that your income sources will not cover all of your expenses.
When this is the case, we need to see if you have saved enough. to make your money last throughout retirement. And there was a study done back in the 1990s by Bill Bengen called the 4 percent withdrawal rule. And basically what it says, if you start out with a diversified investment portfolio, you can withdraw 4 percent of the value of the portfolio the first year of retirement and then increase those withdrawals each year for inflation.
For example, if you have saved 1, 000, 000, you could withdraw 40, 000 the first year of retirement. Then, if there had been 3 percent inflation in the second year of retirement, you could draw out 41, 200. This is the original 40, 000 withdrawal with an inflation adjustment of 3 percent in year two. The 4 percent withdrawal rule was backtested to show that you would not run out of money over a 30 year time horizon using historical asset allocation models.
of the past [00:11:00] performance of stocks and bonds. Once we understand the 4 percent withdrawal rule, the next step is to look at your specific situation to see what your withdrawal rate would be that first year of retirement, which of course is calculated for you if you’re using the retirement budget calculator.
Now, it’s possible that you may have a higher withdrawal rate that first year of retirement. Don’t panic. Sometimes people have a higher initial withdrawal rate due to delaying their social security or sometimes people have a high withdrawal rate because of the extra spending that they’re planning on doing the first few years of retirement.
While the 4 percent withdrawal rule is a good starting point, it can be, and it really should be adjusted based on your individual circumstances and needs. Another way to ensure that your savings last throughout retirement is to have a diversified investment portfolio. This means having a mix of stocks and bonds and cash to help reduce risks and maximize returns over time.
It’s important to regularly review and adjust your investments as needed to accommodate market changes and your personal goals for [00:12:00] retirement. Now the next sources of income we need to be thinking about are your required minimum distributions. Many people have qualified retirement accounts such as 401Ks, 403Bs, and IRAs where they’ve been saving for retirement.
One of the great things about those accounts is that in many instances the contributions helped you pay less money in taxes during your earnings years and those accounts grew tax deferred. But the IRS has a rule that says the money can’t stay in those accounts forever. So that is what the required minimum distribution is.
It is the age in which the IRS says you must begin taking money out of your retirement accounts or face penalties. Originally required minimum distribution started at age 70 and a half, and then that was updated to begin at age 72. And then the Secure Act 2. 0 came along, and now required minimum distributions start at age 73 for those born after 1951.
And then if you were born after 1959, your age for required minimum distributions will be increased from age 73 to age 75. [00:13:00] The next thing we need to be thinking about is the order in which you tap into your accounts to generate retirement income, which brings me to withdrawal order. Many people will have different types of accounts that will be treated differently for federal income taxes.
Brokerage accounts typically incur taxes on interest, dividends, and capital gains. Non qualified income annuities benefit from the exclusion ratio. Which helps determine the portion of income that is a return of principal versus taxable earnings, health savings accounts, HSAs, Roth IRAs, reverse mortgages, and loans from life insurance cash value provide tax free income.
Qualified accounts such as 401ks and IRAs are taxed as ordinary income. Because these different accounts are not all taxed the same, you’re going to want to explore different withdrawal strategies. The default that many advisors use is to withdraw your taxable, then your tax deferred, and then your tax free accounts last.
However, in some cases, it may make more sense to withdraw your tax free, your taxable, and your tax deferred accounts last, [00:14:00] or what could make the most sense for your specific situation is to strategically withdraw from a combination of accounts so that you’re being mindful of your tax liability each year.
Remember, it’s not about how much money you make, rather how much money you actually get to keep after Uncle Sam takes their slice of the pie. It’s your after tax income that funds your lifestyle. A plan is not something you’re going to do once and be done. Rather, it’s something that you’re going to use as a guide for making decisions.
Your retirement journey is going to have twists and turns, and a good plan is an evolving map to help you get to your destination. In summary, begin your retirement planning journey by understanding your essential expenses. Then, dream about your discretionary expenses and how much those extras will cost and how long they’re going to last.
Remember to take into consideration health insurance and health care expenses based on different ages. Once you have a good handle on expenses, then you can begin to focus on the different income sources that you’re going to have in retirement. By understanding your income and expenses, you can [00:15:00] calculate your secure income score to see how much of your essential expenses are covered by guaranteed income.
Once you’ve completed these initial steps, the next step is to add up all of the liquid investment accounts you plan to withdraw from. Then, you can estimate if your withdrawal rate is sustainable. And finally, after you begin to experiment with different withdrawal order strategies to determine which one puts you in the best position.
One thing you’re going to need to decide is what constitutes best. Is best having the highest account balances remaining at death, or is the best strategy knowing that you died with zero? Is the best strategy paying the least amount of money in taxes or receiving the most income from social security over two people’s lifetime?
Ultimately, the best strategy depends on your individual goals and priorities. It’s important to regularly review and adjust your retirement plan as needed, taking into account changes in the market. Tax laws and personal circumstances with careful planning and consideration of all the sources of income and expenses, you can achieve a really [00:16:00] secure and fulfilling retirement that meets your unique needs and desires.
Retirement really should be a time to enjoy life. So make sure that you’re including room for leisure activities and travel and other hobbies in your budget and your spending plan. And don’t forget about setting aside some funds for unexpected expenses or emergencies. In conclusion, while retirement planning may seem overwhelming at first, breaking it down into smaller steps and focusing on the key components of expenses, income, withdrawal strategies really can help make it more manageable.
Thanks so much.
Announcer: Thank you for tuning in to Sound Retirement Radio. For articles, links and resources from today’s show, visit sound retirement planning.com. If you enjoy the podcast, share it with a friend and give us a five star review. Ready to kickstart your retirement planning head over to retirement budget calculator.com.
Need assistance with. Explore our services at parker financial. net. [00:17:00] Information and opinions expressed here are believed to be accurate and complete. For general information only, it should not be construed as specific tax, legal, or financial advice for any individual, and does not constitute a solicitation for any securities or insurance products.
Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company.
Investing involves risk. Jason Parker is the president of Parker Financial, LLC, an independent fee based wealth management firm located at 9230 Bayshore Drive, NW, Suite 201, Silverdale, WA. For additional information, call 360 337 2701 or visit us online at soundretirementplanning. [00:18:00] com.
