After spending your whole career saving up for retirement, there’ll come a day when it’s time to switch gears. In retirement, you’ll be entirely responsible for creating your own “paycheck” (aka “retirement income”) based on your various sources of income—including the savings and investments you’ve spent decades accumulating in preparation for this moment.

While there seems to be so much emphasis on saving for retirement, people are often surprised at just how important (and sometimes complex) it is to strategize your spending plan. Which sources will you decide to pull from at what point during retirement impact your lifelong tax liability, your portfolio’s longevity, and your legacy goals?

Here are a few areas to focus on to help you on your decumulation journey in retirement.

Start By Understanding Your Retirement Income Needs

To build a successful retirement income strategy, you must begin with a solid understanding of your retirement financial situation.

With the help of a financial professional, calculate your total savings and investments, as well as other expected income sources (like Social Security, annuities, or a pension plan). 

Then, calculate your anticipated expenses and lifestyle needs in retirement. Predicting this can be difficult, but try your best based on your current spending habits and any expected changes. For example, if you plan on moving to a new city in retirement, you may want to research your retirement destination’s cost of living and adjust your budget accordingly.

Also, consider future unexpected expenses, like medical costs or long-term care. The longer your life expectancy, the greater the chance that you may experience an unexpected (and costly) emergency. 

With an understanding of how much you’ll expect to have and what you anticipate spending, you can better determine an annual withdrawal rate or amount. Your withdrawal rate can help you understand if your expectations for retirement are realistic or if you need to readjust based on how much you’ve accumulated. Again, a financial professional can help you review the numbers and make this type of determination.

Identify Your Sources of Income

Aside from “Will I have enough?” one of the biggest questions retirees often ask themselves is where their money will come from in retirement. As we mentioned, you’ll need to create your own “paycheck” to replace what you earned from an employer during your working years. To do that, you and your advisor will want to review all possible sources of income for tax treatment, age requirements, and other factors to figure out the most appropriate withdrawal strategy.

Common sources of retirement income include:

Social Security: Once you turn 62, you will be eligible to receive Social Security benefits. However, the earlier you begin receiving benefits before full retirement age (around 67), the lesser your monthly payments will be. If you wait past full retirement age up to 70, you will receive an additional credit and maximize your monthly payments.

Pension plans: While they’ve become a less common option, some governments and organizations still offer pension plans to some long-term employees. Depending on the specifics of your plan, you may have the option to either receive a lump-sum payout or regular payments over time in the form of an annuity. 

Personal savings and investments: You’ve likely been setting aside savings for retirement in a dedicated tax-advantaged retirement account like a 401(k), IRA, 403(b), or Roth account. You will also likely draw from your taxable brokerage account in retirement. While it doesn’t provide the same tax advantages as certain retirement accounts, it has more flexibility and no limitations (such as age requirements or required minimum distributions).

Guaranteed income: Some retirees find it helpful to incorporate guaranteed income policies into their retirement income plan—especially considering how many unknowns surround retirement (lifespan, future care needs, market conditions, inflation, and more). Some standard annuity and insurance policies include:

• Immediate annuities: Individuals may purchase the annuity contract in one lump sum payment and then begin receiving immediate monthly payments.
• Deferred annuities: Individuals can invest in the annuity contract, but they delay monthly payments until later. 
• Longevity insurance: Should you live beyond a certain age, longevity insurance will provide regular payments for the remainder of your lifetime—acting almost in the opposite manner as life insurance.

Review Withdrawal Strategies

Everyone’s withdrawal strategy will look different since it’s meant to be based on individual circumstances. There are a few general rules, however, that can help retirees understand what to aim for when developing their own tailored strategy.

The 4% Rule: Retirees can safely withdraw about 4% of their portfolio or savings each year to ensure their portfolio will outlast their lifetime. The 4% rule is meant to be a very general rule of thumb based on some assumptions that may not be true. For example, this rule is based on a 30-year retirement, which may not reflect your plans.

The Bucket Strategy: Some retirees divide their savings into three different “buckets” in retirement, each representing a period of time. The first bucket is for immediate retirement spending, the mid-term bucket is for the upcoming years, and the final bucket is for your future retirement spending. There is no specific time horizon for your buckets; it’s up to you how you’d like to divide the retirement years. Each bucket will include assets of varying liquidity levels, tax treatments, and growth opportunities.

Systematic Withdrawals: With systematic withdrawals, you can establish pre-determined withdrawals that will automatically come from your retirement accounts at regular intervals (monthly, quarterly, annually, etc.). You and your advisor can work together to adjust the withdrawal amount based on recent market conditions and personal needs, such as covering an additional expense.

Creating Your Retirement Income Strategy

It’s hard to believe, but saving for retirement is only half the battle. To ensure your hard-earned wealth outlasts your retirement, you’ll need to develop a strategic withdrawal strategy that considers your tax liability, future costs, and changes in market condition.
As you approach retirement, consider speaking with a financial professional to learn more about changing from accumulating savings to spending it down. Feel free to contact our team today to schedule a time to talk.