Developing a Reliable Income Stream is Complex but Worth It
Are you approaching a financial tipping point? You know, the one where your paychecks end but your expenses do not? If you see your retirement on the horizon, the idea of crossing this bridge can cause a bit of anxiety. It’s a difficult mindset adjustment to go from diligently saving to spending your savings, and you may have worries about outliving your nest egg. If so, consider making smart decisions now that can set you up with a reliable income stream in retirement.
While it’s never too early to begin planning for retirement, the following tips are best followed when you’re about ten years away from leaving the working world:
Start Thinking About Maximizing Your Social Security Benefits
According to the Stanford Center on Longevity, Social Security benefits account for anywhere from 60 to 80 percent of income for the average retiree. Naturally, it’s smart to maximize those monthly checks, which you can do by delaying collecting your benefits. You can start collecting as early as age 62, but your benefits won’t max-out until age 70. If you’re able to, it’s optimal to wait until max-out age, especially if you’re single or the higher wage earner in your marriage. Many people do this by tapping their retirement accounts or working a few hours per week to take the place of Social Security income in the interim.
Circumstances vary, of course, and the AARP offers a free Social Security calculator that can help you decide when to start collecting your benefits. It’s also a good idea to talk with a financial advisor about the best timeline for your unique situation.
Consider Other Sources of Guaranteed Income
While having a guaranteed Social Security check provides some peace of mind, these benefits may not cover all your fixed expenses in retirement. If this is the case for you, you may want to consider creating another guaranteed income stream for yourself, namely an income annuity. This financial tool acts as an insurance policy, offering you a lifetime of monthly payments in exchange for a lump sum upfront. Unlike traditional investments, an income annuity won’t be impacted by stock market fluctuations.
If an income annuity isn’t the right option for you, a reverse mortgage may fit the bill. This is a type of loan that allows you to use the equity in your home to receive a monthly income. This is possible even if you still have a mortgage loan to pay off.
Make Sure Your Withdrawal Strategy is Sustainable Over the Long-Term
Traditionally, many financial advisors have advised retirees to use the 4% rule as a guide. In this strategy, you would withdraw 4% of your portfolio in your first year of retirement, then adjust that amount each year to keep up with inflation. Historically, this has been a low-risk strategy aimed at ensuring you won’t outlive your nest egg.
At the moment, though, some financial professionals are advocating a strategy with even lower risk, referred to as the “Spend Safely in Retirement” method. Developed by the Society of Actuaries, this withdrawal strategy suggests basing your annual withdrawal rate on the IRS’ required minimum distribution (RMD) rules. So, for instance, a 60-year-old would withdraw a smaller percentage than a 70-year-old. In this strategy, withdrawals should be made at the end of each calendar year and moved into a savings account to protect the principal for use over the following calendar year. While this approach offers less risk than the 4% rule, it also means you’ll have variable income from year to year.
Don’t Get Out of the Markets
Retirees are often tempted to put all of their money into safe investments, like bonds or savings accounts. However, these investments don’t keep up with inflation over time. While it can feel risky, it’s important to keep as much as 50 percent of your assets in stocks so you can produce more income over time. Think index funds or those with low-cost target dates in order to minimize risk.
Setting Yourself Up for Success
Setting up a retirement “paycheck” can give you peace of mind and ensure all your basic needs will be met for the duration of your retirement through one or more reliable income streams. However, don’t neglect other crucial financial steps, like maintaining an emergency fund and planning for unexpected expenses, too.
Planning for your retirement requires making many decisions, including with regard to the above tips. If you think you might benefit from a discussion with a financial advisor, please reach out to us today. We take pride in helping our clients reach their retirement goals and we look forward to offering guidance specific to your circumstances. Please contact us today to learn how to get started.