How to create a retirement income plan
A balanced approach to retirement income strategies and retirement expenses can help you get the most out of your post-work years.
Retirement means making the switch from accumulating financial assets to generating income from them. That transition can be difficult if you don't have a plan in place. How much should you budget for retirement expenses and how do you focus on retirement income planning? That can be a worrisome question, and some might not know the answer. And that could lead them to do less than they should to adequately plan for their retirement years. Some might even ignore creating retirement income strategies completely. But a lack of planning today shouldn't lead to a lack of planning for tomorrow.
Budgeting for retirement
Budgeting for retirement can be difficult. And when it comes to post-work years, many people might not understand how to tackle budgeting for their golden years. They want to enjoy retirement freedom but may not be sure how to balance spending their retirement savings on fixed expenses as well as discretionary ones including travel, hobbies and more. All of that translates into lots of questions around retirement spending strategies.
Budgeting never really stops and is particularly important during retirement when income streams may be more limited. A retirement budget is an essential tool in understanding how much income you'll need to fund your vision of retirement.
Keep in mind that financial experts estimate you'll need between 70%–90% of your pre-retirement income to maintain your standard of living in retirement. This estimate can help determine if your budget is realistic.
To help get your budget started, add up your fixed expenses — the ones you know you’ll have each month in retirement. By reviewing the list of common retirement expenses below, you can begin to develop a sense of what your personal cost of living in retirement could look like. It also provides some items you should consider as you develop your retirement budget.
- Housing: This may include property taxes, insurance, utilities, home repairs, home maintenance and household supplies.
- Taxes: Your income such as Social Security, 401k and IRAs, may be subject to taxes.
- Transportation: Daily costs in this category may decrease as the need for commutes — or even multiple cars — declines. However, budgets should still include fuel, insurance, maintenance and repairs.
- Healthcare: This category tends to increase with age. It encompasses health insurance but not long-term care costs.
- Food: As people age, food expenses might decrease as retirees may have more time to cook at home and fewer people to feed.
- Communications: Many retirees prefer to stay connected with family, friends and current events. Remember to include items such as cellphone service, internet and cable as part of your retirement expenses.
- Charities: Some retirees continue budgeting for charitable donations.
After you figure out your fixed expenses, add up your discretionary expenses which are the optional things you plan to spend money on. These expenses might include entertainment, travel, hobbies and other perks that can make life more enjoyable.
Income planning for retirement
With a budget in hand, it’s time to look at how you'll generate income in retirement. In general, retirees may expect to rely on several different savings and investment accounts as well as possibly continuing to work to help fund their retirement. Retirement income categories might include:
- Social Security: This is structured as a replacement of a percentage of your pre-retirement income based on lifetime earnings. Generally, you can start your withdrawals as early as age 62. However, doing so means that you'll reduce your benefits — permanently. If you wait a few years until your full retirement age, there is no reduction in benefits. In fact, every year that you wait past age 62 increases your benefit level. Waiting until you reach your full retirement age increases your amount to 100% of your monthly benefit. And delaying until age 70 boosts that by about 77% above your age 62 benefit.
- Pensions: These are created and funded by some employers to provide income for employees when they retire.
- Annuities: An annuity can help provide additional regular income. These products provide monthly payouts for life (or a specific period of time) in exchange for a single, up-front premium or series of premiums.
- Part-time work: At the time of the 2020 Census it was reported that almost 27% of people aged 65-74 were still working. The income generated from part-time work can help with expenses and often provide a sense of purpose.
- Investment portfolios: Several factors can impact how much income you can expect to withdraw from your retirement savings. Some important factors you may want to consider include your retirement age, life expectancy assumptions and your portfolio’s diversification.
- Traditional Individual Retirement Account (IRA) or Roth IRA: These individually funded accounts grow tax deferred. Contributions have an annual limit, but catch-up contributions are allowed for those 50 and older.
- 401k: Offered by some employers, a 401k is a retirement savings plan offering tax benefits. Plans typically have a component for employers to match a percentage of whatever an employee contributes. For those 50 and older, the catch-up provision allows contributing an additional amount above the maximum contribution.
- Life insurance: Proceeds from policies can provide for care and living expenses for those left behind or fund legacy plans for loved ones, causes or organizations.
Whatever path you choose, just remember that having multiple sources of income in retirement can help increase the flexibility of your retirement income plan. Creating a retirement plan might help address any concerns you have about volatility and longevity while still giving you a chance to fully fund your vision of retirement.
What happens if you must start retirement earlier than planned?
For many people, a retirement plan includes a clear idea of when they want to retire. But an economic downturn, health problems or family needs may trigger an unexpected early retirement. If you must retire earlier than planned, you may be worried about keeping your finances on track. Here are some ways to help navigate unexpected changes.
- Cut your spending. Review your expenses and look for ways to save. Perhaps you're paying for things like subscriptions, gym memberships or lawn care services that you could go without. Consider eating in instead of dining out or even shopping around for lower prices on internet and phone services.
- Downsize. Reducing some of your biggest fixed costs, such as housing, might help you close any gaps in your new financial reality. For instance, moving to a smaller house or downsizing from a house to a condo could help reduce or eliminate your monthly mortgage payments freeing up additional funds in your budget.
- Consider a new ZIP code. Moving to a different city or state might help lower your overall cost of living. In a more affordable region, you may pay less for housing as well as taxes, utilities, groceries and medical care. However, consider the impact moving might have on other aspects of retirement, such as whether you'd have to travel to see family.
- Pick up a flexible part-time job. If you're forced into early retirement but can still work, a part-time job might help you stretch your retirement funds. You might enjoy consulting or teaching on the side, while others find the gig economy — like working for a ridesharing or delivery service — provides both income and control over their schedule.
- Revisit your vision for retirement. Ultimately you may not be able to make your new budget fit your old vision of retirement. Whether you planned on traveling the world or relaxing by the beach, take time to revisit the life you want to live in retirement vs. what you can afford, and decide on a new strategy to help you get there.