The way you receive income changes in retirement. Instead of earning a paycheck every other week from an employer, a large portion — if not all — of your income in retirement will be derived from your assets. But if you don’t change your financial strategy, you could risk outliving your savings.
Step No. 1: Create an income plan
The first step in this transition requires you to assess your financial situation. List your assets, including savings, investments, real estate and retirement accounts. Then determine your current and future living expenses, considering inflation and health care costs, and calculate those expenses with guaranteed income sources including Social Security, pensions and 401(k) and IRA savings.
Once you’ve got an idea of your financial situation, you’ll want to create an income plan. Organize your different sources of income into the following three categories: guaranteed income, investment income and portfolio withdrawals. Guaranteed income is the funds you’ll receive from Social Security, pensions and annuities. Investment income refers to dividends, interest and any rental income. Your portfolio withdrawals will come from your IRA, 401(k) and any other taxable accounts.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Step No. 2: Create a withdrawal strategy
The other component of your plan should include withdrawal strategies for these accounts. Consider using the 4% rule as a starting point for annual withdrawals from retirement accounts and opt for dynamic withdrawals to adjust based on market conditions.
With a plan in place, you can now optimize your asset allocation. When it comes to your portfolio, it’s important to keep it diverse by maintaining a mix of stocks, bonds and cash to balance growth and stability. You’ll also want to increase liquidity by ensuring you have access to one to three years’ worth of living expenses in cash or short-term bonds to cover immediate needs. It’s also important to adjust your risk tolerance by shifting to more conservative allocations when needed to reduce volatility, yet maintain growth potential as you’re nearing or entering retirement.
When transitioning from earned income to retirement income, minimizing your tax burden becomes even more important. You must therefore plan how you’re going to withdraw funds from your various accounts. Prioritize making withdrawals from your tax-advantaged accounts, such as Roth IRAs and health savings accounts (HSAs). You also need to be aware of required minimum distributions (RMDs), particularly for traditional IRAs. For traditional IRAs, you must start making withdrawals once you turn 73. As for your 401(k) or profit-sharing plans, you can delay taking RMDs until the year you retire, unless you’re a 5% owner of the business sponsoring the plan, the IRS states.
As for Roth IRAs and designated Roth accounts, RMDs aren’t required until you die. Once you die, your beneficiaries will be required to take these distributions, complying with the IRS’ guidelines.
Another tax-efficient strategy is to harvest capital gains, by taking advantage of lower tax rates on capital gains in low-income years.
Step No. 3: Monitor and adjust
If you’re looking for ways to grow your income in retirement, look for opportunities to make passive income. You can invest in dividend stocks, get involved in real estate by investing in rental properties or REITs or purchase annuities.
Once you reach retirement, it’s important to monitor these strategies and make adjustments as needed. Keep your expenses in check, especially in the early years of your retirement, and make sure your investments are keeping up with your financial goals. Market changes can also impact your financial situation and may require you to adjust withdrawals or asset allocations. A financial adviser can help you navigate these challenges, while helping you create a plan that suits your specific needs.
These independent views and opinions are expressed are those of Joel Russo and are not necessarily the opinions of CoreCap Investments. Securities sold through CoreCap Investments, LLC, a registered broker-dealer and member FINRA/SIPC.
Related Content
-
States with the Highest Income Tax Rates for RetireesState Tax You may reconsider living and retiring in one of these states due to high taxes.
-
5 Reasons Wealthy Americans Are Skipping Homeownership: Millionaire Renters on the Rise:Homeownership isn’t for everyone, even millionaires. Discover why wealthy individuals choose to rent instead of buy, from financial flexibility to investment strategies.
-
What Retirees Need to Know About TaxesTake steps to avoid a surprise tax bill and underpayment penalties.
-
My Husband Is Terrible With Money. I Worry He'll Quickly Spend Our $1.3 Million Nest Egg. How can I Ever Retire?We asked expert financial advisers and therapists to weigh in.
-
Roth Conversion in a Down Market: Is it Right For You?Facing a future tax hit on your retirement savings? A Roth conversion may be a way to lower the taxes you owe.
-
Tax Advantages of Oil and Gas Investments: What You Need to KnowTax incentives allow for deductions and potential tax-free earnings — benefits accessible only to accredited investors in small producer projects.
-
Charitable Contributions: Five Frequently Asked QuestionsMake the most of your good intentions by understanding the ins and outs of charitable giving. A good starting point is knowing what's deductible and what isn't.
-
Financial Leverage, Part Two: Don't Say We Didn't Warn YouA lesson in how highly leveraged investments can benefit the first movers and crush the next round of buyers.
-
Taxes in Retirement: What ESOP Participants Need to KnowMost Employee Stock Ownership Plans (ESOP) participants transfer company stock to an IRA starting around age 55, so taxes on that money have been deferred.
-
The US Postal Service Does More Than Deliver MailWith talk of cuts to the USPS swirling, here are the ways it provides vital services to the nation’s older adults.
