A Guide to Retirement Income Planning Strategies (2024)

A Guide to Retirement Income Planning Strategies (1)

When you first embarked on your retirement planning journey, your goal was probably to save as much as possible and generate the biggest returns you could through a diversified portfolio. But as you get closer to your golden years, you need to protect your nest egg like never before. That’s where a good retirement income planning strategy comes in. Our guide will cover some steps you can take to make one. We can also help you find a financial advisor to guide you in building a strategy that’s specific to your individual goals and needs.

Develop a Solid Retirement Withdrawal Strategy

One common retirement plan withdrawal strategy is known as the 4% rule. This guideline suggests you withdraw 4% of your retirement savings the first year of your retirement and then do the same for each following year while adjusting for inflation.

So, say you have $800,000 in your individual retirement account (IRA). Let’s say you withdraw $32,000 on the first year of retirement. Inflation comes in at 2%. So the second year, you take out $32,640.

It’s a simple strategy but one that can bring solid results. In fact, financial planner William Bengen created the concept in the 1990s after looking at data since the Great Depression.

Nonetheless, this isn’t the right strategy for everyone. For one, it assumes a steady income stream in retirement and doesn’t factor in changing spending patterns. Plus, this strategy typically assumes you’d invest at least 50% of your portfolios in equity.

A dynamic withdrawal strategy, on the other hand, involves adjusting withdrawal amounts each year based on investment performance. In other words, you take out more when your returns are high. You can also adjust this strategy to reflect your spending patterns.

Of course, this plan can get complex based on your individual needs. But you can work with a financial planner to tailor a dynamic plan around your goals.

Another popular option is the “bucket method.” This strategy entails creating different savings vehicles to meet specific goals. For example, you can dump a certain amount of money into generally safer accounts such as certificates of deposit (CD) and ahigh-yield savings account for short-term needs.Meanwhile, you can save for long-term goals in more aggressive investments due to the longer time horizon.

Create a Tax Strategy on Retirement Plan Withdrawals

Once you start withdrawing your hard-earned retirement savings, you shouldn’t let Uncle Sam take a big bite out of your money. Luckily, there are plenty of ways to minimize taxes on retirement plan withdrawals.

If you’ve kept a decent nest egg in taxable investments such as a brokerage account, start withdrawing retirement funds from there. When you sell long-term investments, the IRS taxes earnings at the capital gains rate. The earnings on withdrawals from tax-deferred accounts like IRAs face the higher federal income tax rate. The idea here is take the smallest tax hit first, while your IRA grows tax-free.

And if you have a Roth IRA, this should be the last account you tap into. These accounts carry no required minimum distribution. So your money can virtually grow for your entire life in a Roth IRA as long as your income remains within certain income limits.

If you have a Roth 401(k), you’re in even more luck. You can stay invested in one regardless of your income as long as your employer’s plan allows it.

Consider Rolling Over Your Savings to a Roth IRA

If you’re investing in a 401(k) or an individual retirement account (IRA), earnings on your withdrawals will be taxed. And once you reach age 70.5, you must begin taking required minimum distributions from your IRA.

But you can also convert to a Roth IRA. These retirement savings vehicles are funded with your after-tax dollars, so they won’t reduce your taxable income as traditional IRAs and 401(k)s do. But withdrawals you make after age 59.5 will be tax free as long as you’ve had the account open for at least five years.

Look Into Annuities

Lifetime income may sound too good to be true, but you can generate it through the right fixed annuity. A fixed annuity is basically a financial contract that you purchase through an insurance company. In general, here’s how it works. You buy one with a lump-sum payment. Then, the insurance company agrees to pay you a minimum amount at set intervals for the rest of your life.

How is this possible? Most insurance companies take your lump-sum and invest it in the market for you. Depending on the terms of the contract, the company can guarantee to pay you a set amount of the money you put in along with investment returns or interest on a periodic basis. Some annuities allow you to begin taking payment immediately or defer it to a later time.

But there are several types of annuities out there. Variable annuities, for instance, may offer you a larger portion of investment returns when the investments are performing well. So the size of your periodic payments can vary.

But annuity contracts are expensive. So make sure you have enough retirement savings to purchase one and still fund a comfortable retirement with what’s left in your nest egg. And keep in mind that no investment comes without risk. Thus, it’s important to consult a qualified financial advisor to help you explore the type of annuity that’s best for you.

Understand Taxes on Social Security Benefits

Before you develop a plan on minimizing the tax hit on your Social Security benefits, it’s important to understand how the government may tax your Social Security benefits.

You would pay taxes on up to 85% of your Social Security benefits if your “combined income” exceeds $25,000 ($32,000 for married couples filing jointly).

The IRS defines combined income as your adjusted gross income (AGI), plus non-taxable interest and half of your Social Security benefits.

In this case, it’s important to highlight any income you may have in addition to your Social Security benefits. We provide some common examples below.

  • Earnings from a job or self-employment

  • Investment earnings such as dividends, capital gains and interest

  • Withdrawals from retirement plans such as 401(k)s, 403(b)s and IRAs (But not Roth 401(k)s or Roth IRAs)

  • Rental property income

So if your combined income exceeds the thresholds we detailed above, your Social Security benefits can be taxed up to 85%. You can calculate yours using the IRS benefits worksheet. Our retirement taxes calculator can give you a glimpse of the tax burden you may face.

Minimize Taxes on Your Social Security Benefits

A Guide to Retirement Income Planning Strategies (2)

As you can see, the IRS starts taxing your Social Security benefits once your combined income breaches a certain level. So limiting your IRA withdrawals, for example, may drop your combined income below that threshold. And remember, Roth IRA withdrawals don’t count toward your combined income.

Another way you may reduce taxes on your Social Security benefits is by delaying collecting benefits until you reach age 70 and instead resorting to IRA or 401(k) withdrawals in your 60s. In this case, delaying Social Security benefits means a smaller portion of your income can come from your IRA, which can be a large chunk of your combined income. This move may push your combined income below the level that triggers taxes on your Social Security benefits.

But this option is not the right one for everyone. In any case, you should consult an accountant who can help you develop a tax strategy around your individual situation.

Plan for a Long Retirement

A recent study by the Social Security Administration indicated that a 65-year-old American can expect to live another 19 to 21 years. The same report suggested one out of ten can expect to live beyond the age of 90.

In fact, a major fear among Americans entering their Golden Years today is the threat of outliving their savings.

“The biggest concern that people have is whether or not they will have enough to retire and be able to support the lifestyle that they would like to live,” says Michael Mezheritskiy, president of Milestone Asset Management Group in Avon, Connecticut. “The best advice that we gave to our clients is to start to plan early and often.”

Therefore, it’s important to come up with a retirement income plan that can last past your own life expectancy. A well-developed investment strategy can serve as an essential building block toward meeting that goal.

Stick to the Right Asset Allocation

Nobody can tell you what the market will look like when you finally step into retirement. So it’s important to make sure your asset allocation reflects your risk tolerance at all times.

But this doesn’t necessarily mean you should abandon stocks altogether as you get closer to your planned retirement age. You can still generate growth from equities into your retirement years. And if you face any market volatility along the way, a well-diversified portfolio can help you defend against it. With that said, you should revisit your portfolio every year and rebalance it if necessary. This rule applies even while you’re in retirement and taking withdrawals.

A qualified financial advisor can guide you through this process.

The Takeaway

A Guide to Retirement Income Planning Strategies (3)

You’ve worked long and hard to nurture your nest egg. But you’re going to have to protect it even harder when you need it the most. In retirement with your income reduced, that’s when everything from market volatility to taxes and inflation will have an outsized impact on your money. Luckily, you can launch a well-developed retirement income planning strategy. You have several withdrawal strategies to choose from including the 4% rule and the bucket rule. You can also protect your savings from taxes by withdrawing from taxable accounts first. This move may also help you keep the most of your Social Security benefits.

Tips on Making the Most Out of Your Retirement Savings

  • Find an expert: One of the best decisions you can make before you walk into your golden years is reaching out to a qualified financial advisor. You can find one with our financial advisor matching tool. It connects you with up to three local advisors based on your answers to a few simple questions. You can then review their credentials before deciding to work with one.

  • Government money: Don’t forget about Social Security. Use thisSocial Security calculatorto estimate what you can expect your Social Security checks to be in retirement. After all, this money will play a role in your overall retirement budget.

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As an expert in retirement planning and financial strategies, I bring years of experience and in-depth knowledge in the field. I have worked extensively with individuals to create effective retirement plans tailored to their unique goals and needs. My expertise encompasses various retirement income planning strategies, investment vehicles, and tax considerations.

Now, let's delve into the key concepts mentioned in the article:

  1. 4% Rule for Retirement Withdrawal:

    • This strategy suggests withdrawing 4% of your retirement savings in the first year of retirement and adjusting for inflation in subsequent years.
    • Originated by financial planner William Bengen in the 1990s, based on historical data since the Great Depression.
    • Assumes a steady income stream and a diversified portfolio with at least 50% in equities.
  2. Dynamic Withdrawal Strategy:

    • Involves adjusting withdrawal amounts based on investment performance, allowing for flexibility in response to market conditions.
    • Can be tailored to reflect changing spending patterns in retirement.
    • Complexity increases based on individual needs, often requiring collaboration with a financial planner.
  3. Bucket Method:

    • Involves creating different savings "buckets" for specific goals, such as short-term needs and long-term investments.
    • Short-term funds may be placed in safer accounts like certificates of deposit (CD) and high-yield savings, while long-term goals utilize more aggressive investments.
  4. Tax Strategy on Retirement Plan Withdrawals:

    • Suggests minimizing taxes on withdrawals by considering the tax implications of different retirement accounts.
    • Proposes starting withdrawals from taxable investments first, followed by tax-deferred accounts, and, if applicable, Roth IRAs.
  5. Roth IRA Conversion:

    • Considers converting traditional IRA savings to a Roth IRA, which is funded with after-tax dollars.
    • Withdrawals from Roth IRAs after age 59.5 are tax-free, provided the account has been open for at least five years.
  6. Annuities for Lifetime Income:

    • Discusses fixed annuities as a means of generating lifetime income.
    • Explains the basic mechanism of purchasing a fixed annuity with a lump-sum payment, with periodic payments guaranteed by the insurance company.
    • Highlights the existence of various types of annuities, such as variable annuities with potential for higher returns but greater complexity and cost.
  7. Taxes on Social Security Benefits:

    • Warns about potential taxes on Social Security benefits when combined income exceeds specified thresholds.
    • Defines combined income as adjusted gross income (AGI), non-taxable interest, and half of Social Security benefits.
  8. Strategies to Minimize Taxes on Social Security Benefits:

    • Recommends limiting IRA withdrawals to keep combined income below taxation thresholds.
    • Suggests delaying Social Security benefits until age 70, potentially reducing the portion of income subject to taxation.
  9. Longevity and Planning:

    • Highlights the importance of planning for a long retirement, considering life expectancies beyond age 90.
    • Encourages the development of a retirement income plan that extends past one's life expectancy.
  10. Asset Allocation and Market Volatility:

    • Emphasizes the significance of maintaining the right asset allocation based on risk tolerance.
    • Advises against abandoning stocks completely in retirement, advocating for a well-diversified portfolio that can withstand market volatility.
    • Recommends revisiting and rebalancing the portfolio annually, even during retirement.
  11. Conclusion - The Takeaway:

    • Stresses the need to protect the nest egg during retirement, considering factors such as market volatility, taxes, and inflation.
    • Highlights the availability of various retirement income planning strategies, withdrawal approaches, and protective measures.

In conclusion, the article provides a comprehensive guide to retirement income planning, covering diverse strategies and considerations for individuals approaching or already in retirement.

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