It takes a combination of investments, insurance and savvy risk management to build a truly diversified retirement income plan. A handful of mutual funds, even if they are top-notch, are just the start.
Many Americans are counting on Social Security benefits to fund their retirement, according to a recent article in Kiplinger, “Plot a Smoother Retirement Journey with a Written Income Plan.” However, relying solely on Social Security or even Social Security with income from a few IRAs, is only part of a retirement income strategy. You have to protect your income, with some insurance and a lot of diversification, and you need a written plan. It makes a difference!
Some workers are lucky to have a pension as an additional layer of support. However, an employer pension has become almost non-existent in the past few decades. As a result, many retirees will have to fill the income gap from other sources—such as their own savings and investments—and the money earned on those investments or through post-retirement employment.
This means you need to be smart with your portfolio. It’s critical to your long-term financial security. The way you manage those assets may determine how you’re going to live in the next three to four decades. Therefore, pre-retirees and retirees should have a detailed, written income plan.
An income plan is like a jigsaw puzzle—with many pieces that should fit together to give you the lifestyle you want. This will include your savings, Social Security, pensions, real estate, 401(k)s, and IRAs. The shape and size of each of these puzzle pieces will be based on several factors, including the following:
- The age you plan to retire;
- Your overall net after-tax income goal;
- The size of your overall retirement portfolio;
- Your tax situation now and in the future; and
- Your legacy goals.
A solid income plan can help you to really optimize each piece of your puzzle. That can mean leveraging your investments for liquidity and growth, insurance for income and principal protection and alternative investments for diversification, as well as maximizing your Social Security benefits. Speaking of Social Security, you’ll get higher benefits by waiting as long as possible to claim them. You can choose to retire as early as age 62, but if you do, it can mean a reduction of as much as 30%. If you wait, you can receive your largest benefit by retiring at age 70.
Here are some steps to take that can help you with your retirement math problem:
- Inventory your expenses;
- Make a list of your income sources;
- Compare your estimated essential expenses with your predictable income sources from Step 2;
- Create your plan and allocate assets to accomplish your essential expenses; and
- Protect against the unknown and be ready to update your plan, when needed.
Creating an income plan with the help of a trusted financial advisor and an estate planning attorney may give you a reality check and change how you prepare for retirement. Ideally, this is something you do when retirement is still far enough away, so that you can make the necessary changes in your estate planning.
Reference: Kiplinger (October 2017) “Plot a Smoother Retirement Journey with a Written Income Plan”