Do You Know How to Create a Reliable Retirement Paycheck?

It seems that every few months or so, another new survey or study warns that Americans aren’t saving enough for retirement. And of course that’s worrisome. Many of us need to do better.

But what I’m seeing almost as much these days are people who have been preparing for retirement for years and yet have no idea how they’ll turn their nest egg into the income they will need to get by.

They’ve focused on step No. 1 (saving and investing), but never moved on to step No. 2 (creating a reliable retirement paycheck).

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They are in for a surprise because, without a proper income plan, these conscientious accumulators — who should be able to make a smooth transition into retirement — are instead likely to make some costly mistakes.

In my last article, I offered some do’s and don’ts — and one never — for those who are nearing retirement. Here are five more points to think about as you close in on that important day when your paycheck goes away:

1. DON’T rely on conventional wisdom when claiming Social Security.

There’s no one-size-fits-all answer here, so tune out the noise and run the numbers to see what’s best for you.

Most of the guidance I see urges retirees to maximize their Social Security benefits by waiting as long as possible to file. And that may make perfect sense for you (and your spouse, if you’re married). But it may not.

People often talk about their Social Security benefits as though that money is in some special silo, separate from the rest of their assets, when it should be part of a holistic income plan. Before you make the critical — and difficult to undo — decision about when to file, I urge you to do your research with your specific needs and goals in mind.

Some things to consider include:

• How will your various income streams hold up against inflation during a long retirement? In other words, what’s the best way to keep your money growing?
• How might a significant or lengthy market downturn affect your retirement withdrawal strategy? Having to sell stocks at a loss can have a lasting impact on the longevity of your nest egg.
• Do you hope to leave behind a legacy for your loved ones? Keep in mind that your adult children can’t inherit your Social Security payments when you die. (Only your spouse or an adult child with a disability can receive Social Security benefits based on your record after you pass.)

2. DON’T forget there will be tax implications for any income decision you make.

No one wants to see their hard-earned savings eaten up by taxes. But if you’re planning to pull a large amount of your retirement income from a tax-deferred 401(k), traditional IRA or similar plan, you could be looking at a burdensome tax bill every year. And you’ll likely end up paying taxes on a portion of your Social Security benefits as well.

To minimize the bite, your plan should be set up in a way that helps you manage your tax bracket from year to year based on your income needs.

3. DO make dealing with required minimum distributions (RMDs) an important part of your income plan.

Whether you need the money or not, at some point the IRS is going to force you to start taking distributions from your tax-deferred retirement accounts. The age when those RMDs must start is now 73, and it will eventually creep up to 75. But that day will come faster than you think.

Knowing what you plan to do with those mandated withdrawals could help you reduce your taxes and provide more opportunities to keep that money growing.

4. DO pay attention to how your retirement withdrawals might affect your asset allocation.

The risk in your portfolio can change — a little or a lot –– based on what happens to your various investments throughout the year. And selling certain holdings for income also can affect your mix. Rebalancing can help you keep your asset allocation in line with your risk tolerance as you move through retirement.

5. NEVER go into retirement without an income plan.

It’s preferable to work with a professional to draw up your income plan. If you thought accumulating those assets for retirement was tough, wait until you start using those funds. I often liken it to ascending and descending Mount Everest. We pay far more attention to what it takes for climbers to reach the peak, but in reality, coming back down is more treacherous.

Think of your retirement adviser as a sherpa who is dedicated to getting you safely and comfortably through the second half of your journey.

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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