Congratulations! After years of planning and saving, you’re finally nearing retirement! This stage in life comes with a mix of emotions, but with planning, you can turn your savings into a source of income to cover your living expenses. Here are four tips to help you plan for income in retirement.
1. Make a plan.
The first step is to have a comprehensive financial plan. A custom financial plan serves as a blueprint to inform your financial decision-making and ensure all aspects of your financial life are working together to achieve your goals.
A solid plan puts you in control of your financial future and provides you with the confidence of knowing you have a plan to generate retirement income.
2. Properly structure your portfolio.
One of the best ways to generate income in retirement is by striking a balance between short- and long-term investments.
We typically recommend maintaining three to five years of living expenses in a short-term, semi-liquid investment account. A mix of bond funds typically works well, as it provides capital for opportunistic rebalancing as well as a monthly income. Having a short-term allocation to bonds can prevent you from being forced to sell out to equities at a loss when markets are low.
It’s also important to continue growing your assets throughout retirement in order to help offset inflation and ensure you have enough income to last. We often recommend investing any assets not necessary to fund short-term needs in a diversified portfolio that focuses on growth and inflation protection. While this portfolio should be in line with your overall risk tolerance and investment objectives, it can be invested in riskier assets than your short-term account. Throughout retirement, you can identify opportune times to transfer assets from your long-term savings to your short-term savings in a tax-efficient manner.
3. Implement a tax-efficient withdrawal strategy.
Ideally, you’ve been saving in multiple accounts with different tax treatments, such as traditional IRAs, Roth IRAs, 401ks, and taxable accounts. If so, you may have an opportunity to maximize your retirement income by strategically withdrawing from different accounts in different circumstances. We call this tax diversification.
• Taxable (non-retirement) accounts: These accounts offer the benefits of tax-loss harvesting and have fewer restrictions on contribution amounts as well as fewer distribution penalties.
• Tax-deferred retirement accounts, such as pre-tax IRAs and 401ks: Withdrawals from these accounts trigger ordinary income taxes, as they’ve enjoyed tax-deferred growth.
• Tax-exempt accounts, such as Roth IRAs: These accounts allow tax-exempt investments to grow for as long as possible, and qualified withdrawals are tax-free.
There are two main withdrawal strategies to consider based on your specific goals, tax situation, and income needs.
• Traditional approach: You would withdraw from one account at a time. Typically, the order of withdrawals is from taxable accounts first, followed by tax-deferred accounts, and, finally, tax-exempt accounts. This allows the tax-advantaged accounts to continue growing tax-deferred and tax-free for a longer time. However, it may result in uneven taxable income.
• Proportional approach: This strategy establishes a target percentage that will be withdrawn from each account each year. The amount is typically based on the proportion of retirement savings in each account type. This can help ensure a more stable tax bill and can also help you save on taxes over the course.
The benefit of following a disciplined approach is that you won’t be tempted to spend more than you can afford. This can help you maintain adequate assets to last a lifetime, regardless of market volatility. An advisor can assist you with creating a distribution strategy aligned with your financial needs and tax bracket, whether through a traditional or proportional approach or some combination of the two.
4. Regularly revisit and readjust.
Given the potential longevity of retirement, periodic reviews of your financial plan and income strategy are essential. You don’t have to do it alone — a qualified wealth manager can help you understand how regulatory and market changes may impact you, and adapt your plan as needed to align with your evolving goals.
Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.
