What is Retirement Income Planning?

The U.S. Census Bureau estimates that 50% of women and 47% of men ages 55 to 66 don't have retirement savings. Without retirement savings beyond Social Security, millions of Americans face working well beyond retirement or significantly reducing their lifestyle. Retirement income planning allows you to plan for your retirement with a comfortable standard of living. It's never too early (or too late) to start planning for your retirement income. With a bit of planning, you'll ensure that retirement is fun!

Types of Retirement Income

Retirement income is any source of passive income that you can earn without working. This includes retirement accounts like 401(k)s, individual retirement accounts (IRAs) and Roth IRAs. It can also include other investment accounts, real estate and assets. Common sources of retirement income include:

• Social Security
• Company or government pension
• 401(k) or IRA
• Roth IRA
• Stocks and mutual funds
• Bonds
• Savings accounts and certificates of deposit (CDs)
• Annuities
• Real estate rental income
• Part-time retirement job
• Paid-off house (or rental income)

Social Security Benefits

For most Americans, Social Security is the foundation of their retirement planning. To maximize Social Security benefits, be sure to:

• Work for 35 years or more
• Max out earnings through retirement age
• Delay Social Security benefits until age 70
• Consider claiming spousal benefits at retirement age and delaying additional benefits of the second spouse
• Be sure to take into account Social Security tax if you continue to earn income in retirement and understand how you can reduce or avoid it. 

Employer-Sponsored Retirement Plans

Employer-sponsored retirement plans, such as 401(k) or 403(b), are an essential element for retirement planning if they're available to you. In addition, if your employer offers an employer-match amount, be sure to max that out to gain maximum benefits. For example, if your employer will match your contributions up to $24,000 per year in a 401(k), by contributing $24,000 per year, you’re effectively saving $48,000 per year.  

Individual Retirement Accounts (IRAs)

IRAs are tax-advantaged retirement accounts. Because of the tax advantages, IRAs are essential retirement vehicles after employer-matched accounts and Social Security.

With a traditional IRA, you can deduct any contributions from your income, leading to tax savings upfront. You'll pay taxes when you withdraw the funds at retirement. This leads to significant tax advantages for high-earners whose decreased retirement income may mean a lower income tax bracket later. 

With a Roth IRA, you pay taxes on all contributions upfront, but the earnings are tax-free. A Roth IRA's advantage is the tax-free growth over time. After retirement age, you can withdraw the funds of the Roth IRA without having to pay taxes. 

For both traditional and Roth IRAs, you must invest the funds and diversify investments to get the maximum benefit. A broad-indexed fund is one of the most reliable vehicles for long-term investment growth. 

IRAs don't allow unlimited contributions. For 2023, the contribution limit for all Roth IRAs and traditional IRAs combined is $6,500 or $7,500 if you’re 50 or older. 

Traditional IRAs don’t have an income limit, but Roth IRAs do. You can only contribute to a Roth IRA if you earn less than $138,000 while filing taxes as an individual or $218,000 for married couples filing jointly. 

Roth and traditional IRAs also have different withdrawal rules. With a Roth IRA, you may withdraw the principal contributed before retirement age without penalties. With a traditional IRA, if you withdraw contributions before age 59½, you must pay regular income tax on the taxable amount of your withdrawal plus a 10% federal penalty tax unless you qualify for an exception.

Annuities and Lifetime Income

Annuities are a type of policy issued by an insurance company. An annuity can act like a pension. With an annuity, you put money on a deposit with an insurance company that later pays you a fixed monthly amount. Because annuities offer many options, it's worth researching the best annuities for your goals. The right annuities can generate a guaranteed lifetime income, making them a powerful retirement income planning tool. 

How to Create a Retirement Income Plan in 5 Steps

To create a retirement income plan, it’s helpful to work with a financial planner or retirement adviser to build an individualized plan that considers optimized retirement savings vehicles. 

1. Assess Your Retirement Needs

Estimating retirement expenses includes considering factors such as desired lifestyle, healthcare costs, inflation and potential longevity. Make a list of your expected expenses during retirement, including housing costs, healthcare expenses, transportation, food, entertainment and any other items specific to your lifestyle. It's important to consider essential and discretionary expenses to get a realistic idea of how much you'll need.

For the average American with increasing longevity, planning for retirement of at least 30 years is important. You can use an online inflation calculator to adjust your income needs for inflation in retirement. 

2. Assess Your Current Income 

Next, calculate how long it takes to get to a comfortable retirement with your current income and savings level. How much should you be saving? Compare your estimated retirement expenses to your projected retirement income. 

If your estimated retirement income falls short of projected expenses, consider how to bridge the gap. This can include adjusting the retirement age, increasing savings, exploring investment options or taking on part-time work during retirement.

3. Identify Sources of Retirement Income

Carefully assess your sources of retirement income to identify opportunities and any possible sources you can still improve. Maximize employer-matching options and Roth or traditional IRAs for maximum tax advantages. 

4. Create a Retirement Income Strategy

Balancing income needs, risk tolerance and longevity considerations is vital when planning retirement income. For that, diversification of investments is critical. Don't invest everything in one promising stock or cryptocurrency. 

Instead, build a highly diverse portfolio that includes mutual funds, exchange-traded funds, stocks, bonds, money market and real estate. Speak to an investment adviser to balance your total risk tolerance and ensure that your hard-earned income can earn more for you into retirement. 

5. Seek Professional Advice

Consulting a financial adviser or retirement planning professional can ensure you maximize all retirement income opportunities. These professionals have in-depth expertise and may be able to highlight more ways to earn or save that you're not currently seeing. They will use their expertise to develop a personalized retirement income plan based on individual goals and circumstances. While a retirement adviser might seem like something only the wealthy use, they can benefit everyone. Compared to the potential additional savings, the costs are more than worth it. 

Factors to Consider in Retirement Income Planning

When planning for retirement, the most common mistakes are forgetting to factor in inflation, healthcare or taxes. Here are five factors you shouldn't forget in your plan. 

Inflation

Inflation is typically calculated at 2% to 3% annually, but even some financial planners underestimate inflation increases. Plan for an average of 3% inflation annually until retirement and through retirement years for better security. 

Healthcare Costs

Healthcare costs can add up substantially. Plan for insurance costs and any deductibles within your monthly retirement budget. Make sure to keep strong health insurance coverage to protect your assets in case of unexpected medical expenses. Then, calculate healthcare costs adjusted for inflation as well. 

Taxes

Depending on your sources of income, you may still need to pay taxes in retirement. For example, withdrawals after retirement age from a 401(k) or a traditional IRA are taxed at your regular income tax rate. Social Security can also be taxed. Be sure to speak with a financial planner about tax implications in retirement to ensure you're covered. 

Potential Market Downturns

Potential market downturns can make retirement planning more challenging. It may mean you want to avoid selling investments during the market downturn or that you don't earn as much as expected by retirement age. 

To account for market downturns, build a retirement cushion of additional income sources, and diversify retirement income. If you have four or five different retirement accounts with different types of investments, you're not dependent on one when markets are volatile. 

Asset Allocation 

Asset allocation is the often-forgotten discussion in retirement planning. The key is the diversification of asset types and classes. It's the investing equivalent of not putting all your eggs in one basket. Standard asset classes include:

• Large-cap stocks
• Mid-cap stocks
• Small-cap stocks
• International securities
• Emerging markets
• Fixed-income securities
• Money market
• Real estate investment trusts (REITs)
• Bonds

Your individual risk tolerance determines the balance between growth- and income-oriented investments and secure investments. Consulting a financial adviser to develop an appropriate investment plan will ensure sufficient diversification and a strategy for long-term growth. 

5 Strategies to Maximize Retirement Income

What can you do to maximize retirement if you're already close to retirement age or want to start planning early? Consider these tips. 

1. Delay Social Security

By delaying Social Security up to age 70, you effectively make a significant additional percentage each year on your retirement amount. The Social Security Administration offers an online calculator to estimate your additional savings by delaying Social Security collections. 

2. Continue Part-Time Work

Part-time work can be a fun and fulfilling way to earn extra income in retirement. Check with a retirement planner to understand the effect of part-time income on tax obligations for your Social Security and other retirement income.

3. Downsize Living Expenses

Some people prefer a simple retirement. Whether that's a smaller home or condo or retiring in another country with a lower cost of living, downsizing can be a way to live a flexible and abundant retirement with less. 

4. Diversify Investments

Diversifying investments will increase your chances of having enough at retirement, even if some don't perform well. Consider S&P 500 Index Funds and other highly diverse retirement investment vehicles for less overall volatility to build long-term wealth.   

5. Regularly Monitor and Make Adjustments

Remember that retirement income planning is an ongoing process. You'll need to review your situation and make adjustments accordingly at regular intervals. Retirement income plans can be adjusted as circumstances change, like an increase in income, promotion or other major life events, inflation or market downturns. Ideally, build a budget to have ongoing evaluations with a retirement planning professional to ensure the retirement plan remains on track.

Creating Your Retirement Income Strategy

Planning ahead can make retirement savings easier. A balanced retirement income strategy includes current needs and future goals. A little saved each week or month starting in your 20s can maximize retirement opportunities. Remember that it's never too late to start investing and retirement income planning. Consider it a gift to your future self to make retirement a time to have fun and enjoy life without financial worry.

Frequently Asked Questions