Not everyone has dramatic success as an investor. For many, the key isn’t to have great stock market insights or great luck, but rather the foresight to consistently invest in regular installments over a decades-long timeframe. This is a prudent and time-tested means to accumulating a nest egg for retirement.
However, growing assets in a retirement investment portfolio is different from creating a retirement income plan. Ultimately, the goal is to provide an enduring stream of income in retirement, and to do that, retirees must have a well-thought-out strategy for how to withdraw their accumulated assets. This includes considering ways to help reduce taxes.
Here are two ways to approach a retirement income plan. The first is to figure out how much money you will need to live on during retirement. Many people put together a list of expenses based on their current household spending, making adjustments for things like less money spent on mortgages, clothes and transportation and allocating for higher spending on entertainment (initially), health and long-term care expenses (eventually). Then they position their financial portfolio in an effort to meet that monetary goal.
Another way to approach retirement spending is to figure out how much income you can reasonably expect based on your current income, savings rate and accumulated assets. For many people, Social Security represents a large portion of their retirement income. One source to help determine how much income you’ll receive in retirement is the Social Security Administration’s “Retirement Estimator.” This is an online tool at www.ssa.gov that requests personal information (including prior year taxable income) to verify your identity. It then provides an estimate of your benefits payable beginning at retirement age 62, 67 or 70.1
Once you’ve estimated how much your income resources may provide, you can adjust your retirement lifestyle accordingly. If you don’t perceive having enough income to provide for the lifestyle you enjoy prior to retirement, it may be wise to consider “downsizing” before the big day.
By downsizing early on, you may be able to reposition current assets — such as a large family home, second home, boat or other high-ticket item — to another financial vehicle designed to provide retirement income. The earlier you do this, the more time that alternative financial vehicle may have to potentially grow.
1 Social Security Administration. 2017. “Retirement Estimator.” https://www.ssa.gov/retire/estimator.html. Accessed Nov. 16, 2017.