Retiring means stitching together different sources of income.
When you retire, you’ll share a common experience with everyone who has already made the change: You won’t get a paycheck anymore.
Without this steady stream of revenue, you’ll have to arrange for the income you’ll need. Specifically, you’ll want to answer the following questions:
- What sources of income are you confident you can count on?
- How much income will they provide each year?
- How and when will the income be paid?
- How will you coordinate payments from different sources to create a steady stream of income, so that there’s money in the bank when you need it?
What the income sources are?
You’ll probably count on income from a number of different sources.
Social Security income is paid to people who contribute to the system, and to their surviving spouses.
Defined benefit pensions are designed to provide lifetime income from a plan your employer creates and funds.
Defined contribution plans, such as 401(k) plans, are designed to provide income from contributions and earnings on those contributions, which may be made by you, your employer, or both.
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IRAs are individual retirement accounts.
You contribute income you’ve earned to produce tax-deferred investment earnings that you can withdraw after 59½ as retirement income.
Annuities are fixed or variable insurance company products that allow you to convert your premiums and any tax-deferred earnings to lifetime income.
Personal investments in taxable accounts can provide interest, dividends, and capital gains to use as retirement income or reinvest.
Jobs can provide income if you want to work and work is available.
Putting it together
Managing your finances during retirement involves juggling your sources of income to make sure you have enough money to live on. It’s a lot like making a quilt: No piece by itself is big enough to keep you warm at night.
But properly stitched together, the pieces can provide a lot of comfort.
When the money arrives?
Unlike a paycheck, which arrives regularly, retirement income arrives on different schedules. Social Security, annuity, and pension payments usually come monthly. Others, like stock dividends, arrive quarterly. Interest on bonds is paid semi-annually. Few, if any payments, are weekly or biweekly. That means you have to think about balancing the amount coming in to meet your expenses.
The bigger picture
The regular income you can expect from Social Security and a defined benefit pension depends on your work history. In general, the longer you work and the higher your salary, the more income you can anticipate, up to the annual ceilings. Realistically, though, neither of these sources is likely to be as important a provider of retirement income in the future as it has been in the past. Social Security faces an imbalance between what it collects and what it pays out. And fewer employers are offering defined benefit plans. The retirement income you can expect from investments you’ve made depends on three things: how much is invested, where it’s invested, and the long-term return those investments provide. You have much greater control over these choices, so much greater responsibility for the outcome than you may realize. That’s why it’s critical to put basic investment principles to work, including asset allocation and diversification, across your tax-deferred, Roth, and taxable portfolios. It’s also why you want to start thinking seriously about retirement income before you start thinking seriously about retiring.
Turning investments into income
One of the challenges you face in planning retirement income is that net worth doesn’t translate directly into income that you can use to pay your bills or make new investments. Stocks may pay dividends, but part of their value is the price per share you could realize only if you sold — and that value could drop in a weak market. You can spend bond interest, but if you liquidate the bond when it matures rather than reinvesting the principal, you won’t earn interest in the future. On the other hand, you must take required regular cash distributions from your tax-deferred retirement accounts once you reach 70½. To meet that requirement —and create a cash flow — you might establish a systematic withdrawal schedule, or, in the case of an annuity contract, choose annuitization. That means converting your account value to a lifetime income stream.
One approach is to spread your retirement savings around among a number of products and accounts, each designed to fill a different role. That might mean putting some money in stocks, some in bonds, some in mutual funds, some in real estate, and some in fixed or variable annuities or both.
What You Have To Know Planning for Retirement Income? by Inna Rosputnia
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