Retirement planning is a complex process with high stakes. With so many options for managing savings and investments, it can be tough to know which approach is best. And with so many opinions floating around about how to achieve the retirement of your dreams, it’s challenging to sort through it all with confidence. Going the do-it-yourself planning route often leaves pre-retirees with more questions than answers.
You’re probably familiar with the basic gist of successful retirement planning — set aside as much money as possible until you hit a specific number, invest wisely, keep your lifestyle in check, and you’re home free.
But if you’re like most people, putting your faith into a set of numbers you’ve plugged into a free retirement calculator online isn’t particularly comforting. It’s hard to trust your future to such a rudimentary tool without further direction and reassurance that you’re on the right track.
Let’s say you’ve determined that you need a million dollars stashed away. Are you going to pull it out of the market and put it in the bank the day after you turn in your badge to HR? Is the plan to cut back spending, live on Social Security, and tap into savings only as needed? Will you take systematic distributions from investment accounts at a fixed withdrawal rate? Or will you keep your money fully invested and draw a monthly income?
The most crucial question is, how will you know which choice is best for you?
This is where financial advisors come in. These professionals specialize in helping pre-retirees and retirees make informed decisions about their finances to work towards a comfortable and confident retirement.
Thinking Beyond Your Target Retirement Number
What the online tools and DIY retirement guides may not tell you is that once you retire, income is the primary concern — not just the balance in your savings and investment accounts. While what you’ve accumulated matters, how you convert that wealth to fund your everyday life matters just as much.
An essential aspect of retirement planning is managing cash flow. This involves determining how much income you will need in retirement to cover living expenses, healthcare costs, and other expenses, and then creating a plan to address those needs.
A financial advisor, such as those at Oatley & Diak, LLC, can help you work towards financial confidence by considering inflation, market fluctuations, and tax implications.
Remember, retirement planning is not a one-time event but an ongoing process that requires regular monitoring and adjustments. Your advisor can help you stay on track by regularly reviewing your investments and cash flow, assessing progress toward your goals, and making adjustments as needed. This may involve rebalancing your portfolio to ensure that it remains aligned with your risk tolerance and goals or adjusting your income strategy to account for changes in market conditions.
Pursuing Retirement with Confidence
One of the key roles a financial advisor plays involves helping clients identify their goals and develop a plan to pursue them—with a keen awareness of the importance of retirement income. This requires taking a comprehensive look at your financial situation, including assets, debts, and income streams. From there, your advisor can help identify opportunities for growth and develop a customized investment strategy that fits your objectives.
With the ever-increasing lifespan and rising healthcare costs, retirement income is more critical than ever. A skilled advisor can help you create a strategy for a reliable source of income that can sustain your lifestyle throughout your golden years. With guidance, you can make informed decisions to improve your financial future and help you feel more confident in your financial well-being.
Working Towards the Income You Need
Saving and investing over the years can make retirement attainable, but establishing a consistent income is typically what can make retirement sustainable. Most people find that it’s possible to retire with an income equivalent to a percentage of that to which they’re accustomed, and many find that 80% of their final salary is an ideal number to target.
On average, Social Security only covers about 40% of an individual's income. However, for those with higher incomes, this percentage may be far lower. To make up for the difference, your financial advisor can help you determine how to effectively source additional income. Your sources may include:
Utilizing retirement savings and investments wisely. By creating a disciplined financial plan, you can use your nest egg to make systematic withdrawals from your retirement savings and investment accounts. These accounts can provide a steady stream of income that could match or exceed Social Security benefits, especially if you have saved a significant amount of money.
Considering annuities as an additional source of income. Despite their drawbacks, such as high fees and limited liquidity, some retirees find comfort in having a guaranteed income stream. Annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.
Taking advantage of pensions as a potential source of income. Although pensions are not as popular as they once were and may face funding challenges, they can still be a significant source of income for some retirees, particularly those who work in the government sector.
Leveraging your home equity. Downsizing your home by selling a high-value property and purchasing a more affordable one can free up equity and reduce maintenance expenses, which can help you have more funds available for living expenses in the future.
Generating passive income. This could include various forms of passive income streams such as business income, rental income, dividends, or royalties. These streams can supplement your retirement income without requiring you to actively work for it.
Considering part-time employment. Working part-time can reduce the pressure to deplete your retirement and investment accounts and provide you with additional income to support your lifestyle.
Delaying retirement may indirectly boost retirement income. According to a recent analysis from the National Bureau of Economic Research, even a three to six-month delay in retirement can potentially increase one's standard of living in retirement as much as saving an additional 1% of pay over 30 years.
But you should be aware that earning too much during retirement can affect Social Security benefits. If your provisional income exceeds a specific threshold, some of your Social Security benefits may be subject to taxation.
The calculation for your provisional income takes into account your modified adjusted gross income, 50% of your annual Social Security benefits, and 100% of tax-exempt interest generated from your investments. This includes pension payments and retirement account withdrawals, which are considered ordinary income by the government.
For joint income tax filers, up to 50% of their Social Security benefits may be taxed if their provisional income exceeds $32,000, and up to 85% if it goes beyond $44,000. Meanwhile, single filers may be taxed 50% or 85% of their benefits if their provisional income exceeds $25,000 or $34,000, respectively.
Despite the potential taxation of your retirement benefits, having more retirement income is better than having less. Therefore, it can be essential that you estimate your retirement income needs and potential before retiring and seek advice from a financial professional.
Seeking Retirement Planning Help
Financial advisors can be instrumental in helping retirees and those nearing retirement plan for a confident and comfortable future that strives to provide sufficient income to last a lifetime. Whether you are just starting to plan for retirement or are already well on your way, seeking the assistance of a financial advisor, such as those at Oatley & Diak, LLC, can help you pursue your financial objectives and enjoy financial confidence. Let us know if we can be of any help.
John J. Diak, CFP® is the Principal & Client Wealth Manager at Oatley & Diak, LLC in Parker, Colorado. He assists clients through many difficult lifestyle changes such as business downturns, retirement planning, divorce, the death of a spouse, and family estate issues among others. Oatley & Diak, LLC is a family-run registered investment advisory (RIA) firm that provides clients with investment management and financial planning services in a hands-on, intimate environment. Learn more about them at oatleydiak.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. All performance referenced is historical and is no guarantee of future results. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.