Retirement Accounts • September 4th, 2020

The Paycheck for the Rest of Your Life: How to Generate Income in Retirement

Brian Borchert, J.D., MBA, CFP®, CLU®

Key Takeaways
  • The earlier you start saving the more likely you are to have enough savings for your retirement
  • Efficiently generating income in retirement is key
  • Getting a good grasp on your retirement budget with essential and discretionary expenses can give you a better picture of what retirement may look like

So often financial advice swirling around retirement has to do with how much you’re saving and into what account type. And rightly so - starting saving for retirement early and saving heavily significantly improves the quality and gets you the retirement you deserve.

With improved healthcare and nutrition, retirees are living longer and longer which requires financial preparations during your working years. According to the Society of Actuaries, a 65 year old male today with average health has a 35% chance of living to age 90; for a 65 year old woman in average health the likelihood increases to 46%. For workers that retire at age 65, that’s a 30 year runway to fund with retirement accounts, investment accounts, Social Security and any other income sources.

Saving for Retirement is only the upward climb of the roller coaster ride

Imagine your future self at the moment you’re about to retire. You’ve been a dedicated saver into your available retirement accounts and actively chipped away at your outstanding debts. You’ve built a nest egg that will lead you into the retirement that you’ve always envisioned. But, how do you take that mountain of money and turn it into income that will cover your essential and discretionary expenses? The worst outcome possible is that your roller coaster car goes beyond what your financial tracks allow for. Taking a step back and assessing your retirement budget is a great starting point.

Success in Retirement is success in budgetting

In retirement (just as you have had all throughout your working life), there are essential expenses and then there are discretionary expenses. Common essential expenses include: housing costs, healthcare premiums and out of pocket costs, utilities, taxes, debt payments, groceries and transportation costs. Typically, anything outside of those categories falls into the discretionary expense category which includes: dining out, entertainment, vacations, home improvement projects, gifts, and charitable donations. Some of these discretionary expenses can be monthly expenses but others can be one-time expenses (like a child’s wedding or a home emergency expense) that need to be factored in as well. Both essential and discretionary expenses are necessary for a healthy and enjoyable retirement. The key takeaway is to better understand those needs and wants to accurately forecast how our retirement budget will play out.

You may be asking yourself - "the retirement budget is a good idea but are there guidelines on how much retirement will cost?" As a general rule of thumb for retirement planning, financial experts suggest budgeting approximately 60-90% of the yearly salary you earned during your working life. However, this will be a highly personalized decision depending on your particular retirement plans; a more modest retirement might require less income while an extravagant, travel-the-globe retirement may require more.

Retirement budgeting dictates how you create your retirement income

Once you’ve created your budget and projected how it may change throughout retirement, you can start to figure out how to turn your retirement assets into retirement income options. The first place many retirees look to measure their retirement income is to look at what “mailbox money” (money that shows up every month tried and true) sources they have available.

One of the best retirement income streams that you’ll have will be a consistent paycheck through the election of your Social Security retirement benefits. Because the Social Security system is a progressive payout benefit, lower income earners may replace up to 50% of their career earnings while higher income earners may only replace 25% of their higher career earnings. Nonetheless, this benefit is a foundational starting block to create your monthly retirement income. Depending on your circumstances, you may have a pension, income annuity or rental income that adds additional monthly income to cover your budgetary needs.

Any retirement expenses that you have that are beyond your “mailbox money” will need to come from the withdrawals of retirement and investment accounts like your 401(k) or IRAs. One way this is done is through the IRS’s mandated Required Minimum Distribution (RMD) that will force you to start liquidating those retirement accounts prior to April 1st of the year after you turn age 72. Engaging with a Certified Financial Planner® can help you best strategize on where to put retirement money, how to maximize your withdrawals, plan for your RMDs and simultaneously mitigate investment risk and taxes.

Steps you can take now to improve your retirement income situation

Working with a Certified Financial Planner® can certainly help you chart the most personalized course for your retirement. But there are a few tips that you can consider today to improve the prospects of your retirement.

Delaying retirement has a profound positive effect on your retirement for a number of reasons. Working additional years gives you the chance to continue adding to your retirement accounts and the government even allows for older workers to contribute additional funds to retirement accounts. Not only do those additional funds go a long way but you’re also simultaneously shortening the amount of time that you need those funds to last. Pushing back your retirement from age 65 to 70 means that’s five less years that you’ll have to generate a retirement income.

Defer claiming your Social Security benefits as long as possible. Although you can claim your Social Security retirement benefits off of your work history as early as age 62, it’s probably not in your best interest to do so. If you’re going to continue working later into your 60s or even 70s then delaying is certainly in your best interest. If you’re retiring before that time but have the financial resources to delay Social Security, you can avoid a costly reduction in your lifetime benefits just by waiting.

Craft a household budget now to build up the muscle memory of sticking to a budget so it’s a smooth transition into your retirement budget. There is an added bonus of looking back at your last few months of expenses to see perhaps where money is slipping through your fingers through unused subscriptions or memberships that you can repurpose to other financial goals.

Engage a Certified Financial Planner® early to review your short-term and long-term goals and your finances to assess the optimal financial plan. It’s a lot more fun to ride the retirement roller coaster with an expert who helped build your tracks.

Author

Brian Borchert, J.D., MBA, CFP®, CLU®

Brian Borchert is an independent consulting professional with a transferable financial planning, business planning, and legal practice background. He has led high performing teams in both the traditional financial services space as well as product development and rollout in a FinTech start-up environment. He is a passionate lifelong learner that enjoys solving problems with a resourceful data-driven approach.