Retirement planning can be a daunting task. These four steps can help break the process down into manageable steps.
Retirement planning can seem like a daunting task, but there are measures you can take along the way to help you get on the right path. Below you’ll find four steps that can help as you assess your retirement plan.
Two types of income streams to consider while in retirement are income from work and income from investments.
While saving for retirement, income from work supports your ability to invest using retirement accounts such as a 401(k) and IRAs. These types of accounts allow you to invest and get tax benefits. You may also want to continue working once in retirement, although maybe not at a traditional 9-5 job. Your special interests and skills might work well for a side gig, and that extra income can also be saved for future retirement costs in a special small business retirement plan like a SEP IRA. A “phased retirement” is where people work part-time or do side-gigs after retiring from their primary job. Some people do this to “test the waters” of retirement. Legally, as long as you have income from a small business – no matter how small – you can save some of it, even if you’re taking money out of other retirement accounts. If you do decide to continue to work while in retirement, it may also allow you to rely less on your investments to generate income.
When developing a plan to withdraw from your investment assets – such as mutual funds, stocks, bonds, and retirement accounts — try to make sure you’re covered for your entire retired life. The last thing you want is to run out of money early. Withdrawing based on average life expectancy can mean you have a 50% chance of out-living your assets, so it might be prudent to plan for a long life, not an average one. Also consider Social Security, pensions, annuities, and other insurance that can reduce the amount you withdraw from assets.
Once you have a good handle on your income streams, divide the expenses you’ll have in retirement into two basic categories: core and discretionary. Core expenses include housing, utilities, food, medical premiums and other priority costs. Discretionary expenses are everything else you choose to spend your money on, like dinners out, vacations, new cars, gifts and so forth.
If your plan seems a bit unbalanced and you need to free up more of your retirement income, focus on reducing or postponing your discretionary expenses first. You can also review your core expenses and determine if you can make changes, like living in a smaller house or apartment.
Something to consider when evaluating your expenses is that, typically, folks early in their retirement spend more because they are healthy, have more free time, and are able to travel and spend more on entertainment. After several years, retirees might begin to slow down and spend less on discretionary items. In late retirement, medical and prescription drug costs tend to rise, causing retirees to increase spending.
Predictable income streams include Social Security, pensions, annuities and insurance payments. Try to make sure these types of income can meet your core expenses for the rest of your life. If they don’t, you may want to consider purchasing lifetime income through an annuity or insurance (e.g. longevity, disability and/or long term care insurance) through your insurance agent or a reputable insurance company.
It might also be a good idea to keep today’s core expenses low, so you are prepared in case of big income changes. If married, make sure your core expenses can be covered by one partner, in case the other spouse loses their job. This way you can maintain covering today’s bills, and hopefully also continue to save toward retirement plans. Or at the very least, not dip into retirement plans to cover today’s costs.
When possible, work to increase your contributions to a workplace plan like a 401(k), as well as an IRA. By saving earlier, you allow compounding to work for you.
Lastly, if your employer offers one, you may want to consider a health savings account. HSAs allow you to get a deduction for your savings and use the money for healthcare expenses tax-free – now or in retirement.
One of the most important aspects of a retirement plan is developing a solid emergency fund. All too often not having emergency money causes wasteful expenses, like borrowing high interest debt, or withdrawing from investments at the wrong time.
Key risks to plan for include large medical and long term care costs, death of a spouse/partner, and even family members needing care or moving in with you. Carefully consider whether additional medical, disability, or long term care insurance could help your household protect its wealth from these risks.
As you work through these four steps, don’t forget there are numerous tools and resources to help TD Ameritrade clients as you plan your retirement. Here are a few that might help:
Interested in talking through your ideas or need help building your plan? Click here to schedule a complimentary goal-planning session with a TD Ameritrade Financial Consultant.
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