The Ultimate Guide on How to Craft a Retirement Income Plan
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Contrary to popular belief, an income is not just limited to your pre-retirement days. It is also an essential part of your life post retirement. You spend all your life, saving your money in different types of retirement accounts and schemes. Every account or investment has a different rate of interest, maturity period, tax benefit, and risk factor.
Retirement income planning gives you a clear picture of how much money you have saved up, precisely where your retirement income comes from, and how much of it can be lost to taxes. Many people live under a false illusion of financial security without realizing that a sizeable amount of their savings can vanish away in taxes and penalties if their withdrawals are not well planned.
Table of Contents
Guide to Prepare a Retirement Income Plan
1. Keep a note of all the sources of potential income
Your retirement income is not just limited to individual retirement accounts (IRA), 401 (k)s, and savings accounts. Think of all the potential sources of income that you wish to liquidate during retirement. For example, the property that you bought with the intention of reselling. Try to estimate the value of all your resources at the time of retirement and note down this figure.
2. Analyze the risk for each investment
Are you saving your money in a Certificate of Deposit (CD), or are you aggressively investing in the stock market? Bank savings accounts and retirement accounts like IRAs and 401 (k)s offer a safe and assured interest on your earnings. However, if your investment portfolio is largely dependant on the stock market, you are at a higher risk. Make a list of these sources. If you have some risky investments in your portfolio, try to balance the risk with some relatively safe and assured savings accounts.
3. Include all other unforeseen factors
This includes life expectancy, inflation, investment returns, etc. Try to keep space for some ‘worst-case scenarios’ as well. A good example here would be inflation. What if you prepare for an inflation of 2% but instead get to see an inflation of 4% in the future? It is good to be mentally prepared for unexpected costs. Make sure to save extra so that you are able to cover such costs with your retirement income.
4. Consider flexibility and accessibility
One of the most important things to consider in your plan is the flexibility and accessibility of your money. Your savings should be easily accessible to you without generating penalties and tax liabilities. For example, while real estate is a great financial cushion, it is not an immediate source of income. Many retirement accounts set off penalties if drawn before a certain age. Keep these factors in mind.
Now that you have made a note of these points, the next step is to determine the age when you wish to retire. Your retirement age can affect your Social Security benefits, Medicare, and withdrawals from other accounts.
Now take a piece of paper or open an excel sheet and follow these steps to draft your retirement income plan:
1. Expenses
Allot the first column to expenses. Include costs like mortgage, loan EMIs, insurance premiums, etc. It is also essential to calculate the time for each of these expenses. For example, you may have three more years left to pay off a car loan, but four more to pay off mortgage. Put these statistics in the expenses column.
Make sure to also calculate the taxes on your retirement account and add them to this column. Your tax liability will depend on your retirement accounts, Social Security benefits, etc. Consult a financial advisor to chalk out an estimate of your yearly taxes.
2. Income
As discussed above, make an estimate of all your possible sources of income during retirement. This can include your required minimum distribution (RMD) from retirement accounts, returns from bonds and stocks, and Social Security benefits. If you have inherited your spouse’s retirement account, include that as well.
3. Find the difference
The difference between your income and expenses will give you a clear picture of your post-retirement financial requirements. If the result is negative, then you are falling short of your retirement goals and need to look at other ways of increasing your income. This can be done by increasing your contribution to retirement accounts or investing rigorously in high yielding stocks.
If the result is positive, then you have little to worry about, as you have met your desired retirement goals. Depending on your score, you can also decide to increase your expenses.
If the above math seems difficult, you can also use a calculator to see if your current savings are sufficient for retirement.
To sum it up
Nobody can foresee the future, but everybody can follow a simple philosophy, ‘precaution is better than cure’.
There are many factors that can completely alter your retirement income plans. For example, inflation, change in federal and state policies, etc. However, preparing for these fluctuations and keeping a safety cushion in your plan can help you in many ways. When you make a retirement income plan, it is also important that you take into consideration which state you want to retire in. Pick a state that offers a low cost of living, so your financial plans don’t take a massive hit with probable future inflation.
Retirement income planning is not hard, but it does require you to consider every minute detail of your finances. Do you need help in calculating your retirement income? Reach out to financial advisors and let them devise the most ideal plan for you.
