Now that retirement is here (or near), how do you create an
income plan from your savings? There are five steps.
1. Determine how much
you need to spend to live a life you enjoy.
This is always our first question. The answer ultimately
drives the rest of the decisions. How much money do you need each month to
cover your essential expenses, and to also cover the fun things that you'd like
to do in retirement?
Tracking this spending for the first few years of retirement
is critical, since expenses can run higher than expected. You should be aware
of these fluctuations and make adjustments accordingly.
2. Make the most of
income sources other than your savings.
There's a tremendous amount of benefit that some smart
planning can do for you. For example, choices like when to start taking Social
Security can cut your retirement income by 25% or boost it by an additional
32%. Married couples can use strategies like claiming spousal benefits to
increase income substantially.
If your income comes in the form of rental properties, then
do you need to factor in expenses for maintenance? Should you hire a property
management company so that you don't have to take phone calls from tenants
while you're on vacation? Run through the numbers for your personal situation
and make the right decision.
3. Decide how much
risk you are comfortable with.
Your level of comfort with risk determines how you allocate
your portfolio. In retirement, people usually don't want much risk. Our clients
often express a concern about markets and fluctuation. Yet the reality is that
for a 30-to-40-year retirement with inflating expenses every year, some
allocation to growth assets is helpful if not necessary.
4. Figure out how
much income you need your savings to generate every year.
The amount is your total estimated expenses minus your
Social Security, pensions or real estate income. Once you know how much you
need each year, you can then begin to formulate a distribution strategy, which
we will cover in more detail in an upcoming post.
5. Identify how much
you want to leave to your heirs.
For some clients, this is a top priority; for others, they
want to spend as much as possible while they can. Like most planning questions,
there are no right or wrong answers. If you plan to leave behind a substantial
inheritance, just be aware that it might place limitations on your income.
These are the five simple but important steps that decide
your ability to live the life you want in retirement.
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