During your working career a regular paycheck was something you could set your clock to. Plans were made and bills were paid usually based on the confidence of having a regular and secure income source. Now, as you approach retirement - or if you're already there, you may be concerned about how to ensure you have the same kind of paycheck that can be counted on, and that you won't outlive.
A common belief here at USAA, and among retirement income thought leaders, is that in retirement you should have sufficient guaranteed income to cover at least your essential expenses. Simply put, most folks would like a sense of security, or a “retirement paycheck”, that takes care of at least the most important expenses such as food, housing, utilities, medical premiums, to name a few. The process to help you generate a retirement paycheck is really simple: Add up your “must have” expenses and subtract them from your “guaranteed income sources”. If there's a surplus, you're probably in good shape. If there's a shortfall, then there's some work to do. Here are some steps and tips to help you get started:
It's important to start by calculating your expenses. You should separate essential expenses from discretionary expenses - keeping in mind that what's discretionary to someone else, might be essential to you. In general, essential expenses would be for things like food, housing, transportation, taxes, and medical premiums or copays. Examples of discretionary items would be for the things we like but could possibly live without. Examples include dining out, entertainment, gifting, and travel. Again, it’s up to you to decide, but try to be realistic about what you think it really takes to cover your basic living needs. Also, we're not saying you should give up the fun stuff, but just how to ensure that you at least fund the essentials.
The next step is to add up all your guaranteed retirement income sources. Guaranteed income sources are those that you can count on regardless of what happens to the stock markets, interest rates, or if your renters don't pay on time. Unfortunately, with many employer provided pensions going away, it's now up to you to have guaranteed income in place. For married couples, it’s also a good idea to factor in what, if any, of this guaranteed income goes away when one of you die.
Guaranteed sources of retirement income can include:
What's the difference between your estimated retirement spending and guaranteed income?
If your guaranteed income exceeds your expected retirement spending, then congratulations. However, many of us won't be so fortunate and will have a shortfall between guaranteed income and expenses. It's important to have guaranteed income that covers at least your essential expenses. If you have a gap between income and expenses, then read on.
Investing your money is one thing but generating income from investments while you pull money out of your retirement account may be another. Consider all your investments earmarked for retirement such as employer-provided plans, individual IRAs and other investments. A safe withdrawal rate from these resources will depend on how you are invested, how long you will make withdrawals, market conditions, how much you take out periodically and other factors. Some of these resources may be used to purchase more guaranteed income through income annuities. In addition, you may have equity in your home that can be turned into income through a home equity loan or a reverse mortgage.
Many people have the goal to retire early. The combination of your guaranteed income and other income resources should allow you to do so. If not, it's time to consider how you might increase your income. You could delay retirement, work part time during retirement, or decrease spending by reducing large expenses such as housing or support for other family members.
Since your retirement plan depends on your unique circumstances, seek help when needed.
About the Author: Robert is the USAA Advice Director for Retirement & Complex Financial Planning. He is responsible for developing advice regarding all aspects of retirement planning, estate/trust/inheritance tax planning, charitable gifting, and distribution of assets. Robert is passionate about helping folks from all walks of life achieve retirement security.
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