Retirement Guys: Don’t be overwhelmed by retirement income planningWritten by Nolan Baker Mark Clair | | firstname.lastname@example.org
Retirement can be an exciting point in life. A retiree can stay up late watching TV and turn the alarm clock off and sleep in. The retiree can look forward to fun vacations and travel when it gets cold here in Northwest Ohio. At the same time, retirement can be scary for some people because it is an area of the unknown. The biggest unknown for most retirees is wondering if they have enough money to last the rest of their lifetime. Trying to figure it out can be confusing — but it doesn’t have to be! We suggest breaking your retirement income planning into three comprehensive parts.
Setting a budget may not be much fun, but figuring out how much income you will have in retirement and what the monthly expenses are is information every retiree must know. Take the total expenses and subtract your fixed retirement income. Fixed retirement income is typically made of up pensions and social security. If there is a gap between income and expenses it is often covered by investment income or expenses will have to be cut. For investment income, use a 4 percent or 5 percent rate of return for income planning purposes. If you need an outline to create a budget, just do an Internet search for “personal budget worksheet” and several results show up at no cost.
When reviewing a budget, retirees should also look for ways to lower expenses. Look at the big expenses first. For example, if a retiree is paying $1,000 a month for a mortgage that has only $25,000 left on principal, it may make sense to just take part of the investment savings and pay off the mortgage to free up the monthly $1,000 payment. The same can be true if the person has several high-interest credit cards. Sometimes it’s best to just eliminate this debt to free up cash flow. A common theme we have seen with many retirees that are comfortable in retirement is the fact that they are debt-free. Once the big expenses are reviewed, try and reduce the little ones as well. That old gym membership that never gets used, the cell phone, TV and Internet plan, they all add up.
The next part is to build future pay raises into your retirement income plan.
The cost of living is going to go up and the increases in social security and pension benefits may not keep pace with inflation. One way to do this is to create a specific purpose for each of the investment accounts and set aside money in different buckets that mature at different time frames. Often this is referred to as laddering out the portfolio. Consider creating buckets of money that are to be used in three- to five-year time frames: One bucket of money for current income, one bucket of money that will be used in three to five years, another bucket of money that will be used in six to 10 years, etc. Using this approach can help the retiree with picking different investments for each bucket. It also allows the retiree to set aside more money for peak spending years when income needs could be higher than later in life when people tend to slow down.
The final part in retirement income planning is to look at how much income the surviving spouse will have if the other spouse passes away.
The planning starts by picking the correct pension option and having a plan in place to cover any shortfalls, such as a loss of one Social Security income. One solution to cover any additional income needs is to purchase the correct amount of life insurance. Life insurance can be a great option because the owner can change beneficiaries in the future, say to children, or cancel the insurance in the future if there is no longer a need. Another option to consider is annuity income guarantees. Options vary from company to company and from different products, such as fixed, indexed or variable.
Don’t let retirement income planning overwhelm you. Follow the above three steps and you’ll be on your way to building a solid retirement plan.
For more information about The Retirement Guys, tune in every Saturday at 1 p.m. on 1370 WSPD or visit www.retirementguysnetwork.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537.