Retirement Income Planning: A Comprehensive Guide for 2024
Retirement income planning is crucial for ensuring financial security in your later years. As financial advisors, we aim to help clients develop strategies that will provide steady, reliable income throughout retirement. This guide covers key aspects of retirement income planning for 2024 and beyond.
Understanding Retirement Income Needs
Determining how much income you'll need in retirement is the first step. Consider:
- Your current expenses and how they may change
- Potential healthcare costs
- Desired lifestyle and activities
- Inflation's impact on purchasing power
A common rule of thumb is to plan for 70-80% of your pre-retirement income [8]. However, your specific needs may vary.
Sources of Retirement Income
Retirement income typically comes from multiple sources:
Social Security
For most retirees, Social Security provides a foundation of income. The average monthly benefit in 2024 is $1,907 [7]. Delaying benefits until age 70 can increase your monthly payment.
Employer-Sponsored Retirement Plans
401(k)s and similar plans are major income sources for many. In 2024, you can contribute up to $23,000 to a 401(k), plus an additional $7,500 if you're 50 or older [8].
Individual Retirement Accounts (IRAs)
Traditional and Roth IRAs offer tax advantages and investment growth potential. The 2024 contribution limit is $7,000, with an extra $1,000 allowed for those 50+ [8].
Pensions
Though less common now, pensions provide guaranteed income for life if you have one.
Personal Savings and Investments
Taxable investment accounts can supplement other income sources.
Developing a Withdrawal Strategy
Creating a sustainable withdrawal plan is critical. Consider:
The 4% Rule
This guideline suggests withdrawing 4% of your portfolio in the first year of retirement, then adjusting for inflation annually [8]. While a useful starting point, it may not fit everyone's needs.
Required Minimum Distributions (RMDs)
At age 73, you must start taking RMDs from traditional retirement accounts [3]. Plan for the tax implications of these withdrawals.
Tax-Efficient Withdrawals
Strategically withdrawing from different account types can minimize your tax burden. Generally:
1. Take RMDs first
2. Withdraw from taxable accounts
3. Tap tax-deferred accounts like traditional IRAs
4. Use Roth IRA funds last, as they grow tax-free
Investment Strategies for Retirement
Your investment approach should balance growth potential with risk management:
Asset Allocation
As you near and enter retirement, you can gradually shift to a more conservative mix of stocks and bonds. However, consider maintaining some stock exposure for long-term growth [9].
Diversification
Spread investments across various asset classes, sectors, and geographic regions to reduce risk [9].
Income-Producing Investments
Consider dividend-paying stocks, bonds, and real estate investment trusts (REITs) for regular income.
Managing Retirement Risks
Several factors can impact your retirement income plan:
Longevity Risk
Consider longevity insurance or deferred income annuities to mitigate this risk.
Market Risk
Sequence of returns risk - experiencing poor investment returns early in retirement - can deplete your portfolio faster. Strategies to address this include:
- Maintaining a cash buffer
- Using a bucket strategy to segment investments by time horizon
- Adjusting withdrawals based on market performance
Inflation Risk
Even modest inflation can erode purchasing power over time. Invest in assets with growth potential to outpace inflation.
Healthcare Costs
A 65-year-old couple can expect to spend an average of $315,000 on healthcare in retirement [8]. Consider long-term care insurance and maximize Health Savings Account (HSA) contributions if eligible.
Retirement Income Products
Various financial products can enhance your income strategy:
Annuities
Some of these insurance products may provide guaranteed income. Options include:
Immediate annuities for current income
Deferred annuities for future income
Variable annuities with income riders for growth potential and income
Be aware of fees and restrictions associated with annuities; it is important to review specific features of each product to understand risks.
Reverse Mortgages
For homeowners 62 and older, a reverse mortgage can provide additional income. Carefully consider the costs and impact on your estate.
Social Security Optimization
Maximizing Social Security benefits can significantly impact your retirement income:
Claiming Age
Benefits increase by about 8% annually for each year you delay claiming from full retirement age to age 70 [7].
Spousal Benefits
Married couples should coordinate their claiming strategies to maximize household benefits.
Tax Planning in Retirement
Effective tax management can stretch your retirement dollars:
Roth Conversions
Converting traditional IRA funds to a Roth IRA in lower-income years can reduce future RMDs and tax liability.
Charitable Giving Strategies
Qualified Charitable Distributions (QCDs) from IRAs can satisfy RMDs without increasing taxable income.
Tax-Loss Harvesting
Selling investments at a loss in taxable accounts can offset capital gains and reduce your tax bill.
Estate Planning Considerations
Your retirement income plan should align with your estate planning goals:
Beneficiary Designations
Regularly review and update beneficiaries on retirement accounts and insurance policies.
Trust Planning
Trusts can provide control over asset distribution and potential tax benefits.
Legacy Goals
Balance your income needs with desires to leave an inheritance.
Adjusting Your Plan
Retirement income planning is an ongoing process. Regularly review and adjust your strategy to account for:
- Changes in your health or family situation
- Economic conditions and market performance
- New laws and regulations affecting retirement accounts or Social Security
Working with a Financial Advisor
A qualified financial advisor can help you:
- Develop a comprehensive retirement income plan
- Navigate complex tax and investment decisions
- Adjust your strategy as circumstances change
Look for advisors with relevant credentials like CFP® or ChFC® designations.
Conclusion
Effective retirement income planning requires careful consideration of numerous factors. By understanding your income needs, optimizing various income sources, managing risks, and staying flexible, you can create a robust plan for financial security in retirement. Regular review and adjustment, often with professional guidance, will help ensure your strategy remains on track as you navigate your retirement years.
References:
[2] https://am.gs.com/en-ch/advisors/insights/report-survey/retirement-survey
[3] https://www.ironwoodwm.com/2024-year-end-financial-planning-checklist/
[4] https://allworthfinancial.com/retirement-income-planning
[5] https://www.nationwide.com/financial-professionals/blog/planning-guidance/
[6] https://keenwealthadvisors.com/insights/7-top-retirement-tips-for-2024
[7] https://www.asppa-net.org/news/2024/9/retirement-income-at-center-of-dc-plan-trends/
[8] https://smartasset.com/retirement/top-11-retirement-strategies
[9] https://www.360financial.net/post/financial-planning-for-retirement
Sam Saleh is an investment adviser representative with Savvy Advisors, Inc. (“Savvy Advisors”). Savvy Advisors is an SEC registered investment advisor. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy.
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
Savvy Wealth Inc. is a technology company. Savvy Advisors, Inc. is an SEC registered investment advisor. For purposes of this article, Savvy Wealth and Savvy Advisors together are referred to as “Savvy”. All advisory services are offered through Savvy Advisors, while technology is offered through Savvy Wealth. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors
Retirement Income Planning: A Comprehensive Guide for 2024
Retirement income planning is crucial for ensuring financial security in your later years. As financial advisors, we aim to help clients develop strategies that will provide steady, reliable income throughout retirement. This guide covers key aspects of retirement income planning for 2024 and beyond.
Understanding Retirement Income Needs
Determining how much income you'll need in retirement is the first step. Consider:
- Your current expenses and how they may change
- Potential healthcare costs
- Desired lifestyle and activities
- Inflation's impact on purchasing power
A common rule of thumb is to plan for 70-80% of your pre-retirement income [8]. However, your specific needs may vary.
Sources of Retirement Income
Retirement income typically comes from multiple sources:
Social Security
For most retirees, Social Security provides a foundation of income. The average monthly benefit in 2024 is $1,907 [7]. Delaying benefits until age 70 can increase your monthly payment.
Employer-Sponsored Retirement Plans
401(k)s and similar plans are major income sources for many. In 2024, you can contribute up to $23,000 to a 401(k), plus an additional $7,500 if you're 50 or older [8].
Individual Retirement Accounts (IRAs)
Traditional and Roth IRAs offer tax advantages and investment growth potential. The 2024 contribution limit is $7,000, with an extra $1,000 allowed for those 50+ [8].
Pensions
Though less common now, pensions provide guaranteed income for life if you have one.
Personal Savings and Investments
Taxable investment accounts can supplement other income sources.
Developing a Withdrawal Strategy
Creating a sustainable withdrawal plan is critical. Consider:
The 4% Rule
This guideline suggests withdrawing 4% of your portfolio in the first year of retirement, then adjusting for inflation annually [8]. While a useful starting point, it may not fit everyone's needs.
Required Minimum Distributions (RMDs)
At age 73, you must start taking RMDs from traditional retirement accounts [3]. Plan for the tax implications of these withdrawals.
Tax-Efficient Withdrawals
Strategically withdrawing from different account types can minimize your tax burden. Generally:
1. Take RMDs first
2. Withdraw from taxable accounts
3. Tap tax-deferred accounts like traditional IRAs
4. Use Roth IRA funds last, as they grow tax-free
Investment Strategies for Retirement
Your investment approach should balance growth potential with risk management:
Asset Allocation
As you near and enter retirement, you can gradually shift to a more conservative mix of stocks and bonds. However, consider maintaining some stock exposure for long-term growth [9].
Diversification
Spread investments across various asset classes, sectors, and geographic regions to reduce risk [9].
Income-Producing Investments
Consider dividend-paying stocks, bonds, and real estate investment trusts (REITs) for regular income.
Managing Retirement Risks
Several factors can impact your retirement income plan:
Longevity Risk
Consider longevity insurance or deferred income annuities to mitigate this risk.
Market Risk
Sequence of returns risk - experiencing poor investment returns early in retirement - can deplete your portfolio faster. Strategies to address this include:
- Maintaining a cash buffer
- Using a bucket strategy to segment investments by time horizon
- Adjusting withdrawals based on market performance
Inflation Risk
Even modest inflation can erode purchasing power over time. Invest in assets with growth potential to outpace inflation.
Healthcare Costs
A 65-year-old couple can expect to spend an average of $315,000 on healthcare in retirement [8]. Consider long-term care insurance and maximize Health Savings Account (HSA) contributions if eligible.
Retirement Income Products
Various financial products can enhance your income strategy:
Annuities
Some of these insurance products may provide guaranteed income. Options include:
Immediate annuities for current income
Deferred annuities for future income
Variable annuities with income riders for growth potential and income
Be aware of fees and restrictions associated with annuities; it is important to review specific features of each product to understand risks.
Reverse Mortgages
For homeowners 62 and older, a reverse mortgage can provide additional income. Carefully consider the costs and impact on your estate.
Social Security Optimization
Maximizing Social Security benefits can significantly impact your retirement income:
Claiming Age
Benefits increase by about 8% annually for each year you delay claiming from full retirement age to age 70 [7].
Spousal Benefits
Married couples should coordinate their claiming strategies to maximize household benefits.
Tax Planning in Retirement
Effective tax management can stretch your retirement dollars:
Roth Conversions
Converting traditional IRA funds to a Roth IRA in lower-income years can reduce future RMDs and tax liability.
Charitable Giving Strategies
Qualified Charitable Distributions (QCDs) from IRAs can satisfy RMDs without increasing taxable income.
Tax-Loss Harvesting
Selling investments at a loss in taxable accounts can offset capital gains and reduce your tax bill.
Estate Planning Considerations
Your retirement income plan should align with your estate planning goals:
Beneficiary Designations
Regularly review and update beneficiaries on retirement accounts and insurance policies.
Trust Planning
Trusts can provide control over asset distribution and potential tax benefits.
Legacy Goals
Balance your income needs with desires to leave an inheritance.
Adjusting Your Plan
Retirement income planning is an ongoing process. Regularly review and adjust your strategy to account for:
- Changes in your health or family situation
- Economic conditions and market performance
- New laws and regulations affecting retirement accounts or Social Security
Working with a Financial Advisor
A qualified financial advisor can help you:
- Develop a comprehensive retirement income plan
- Navigate complex tax and investment decisions
- Adjust your strategy as circumstances change
Look for advisors with relevant credentials like CFP® or ChFC® designations.
Conclusion
Effective retirement income planning requires careful consideration of numerous factors. By understanding your income needs, optimizing various income sources, managing risks, and staying flexible, you can create a robust plan for financial security in retirement. Regular review and adjustment, often with professional guidance, will help ensure your strategy remains on track as you navigate your retirement years.
References:
[2] https://am.gs.com/en-ch/advisors/insights/report-survey/retirement-survey
[3] https://www.ironwoodwm.com/2024-year-end-financial-planning-checklist/
[4] https://allworthfinancial.com/retirement-income-planning
[5] https://www.nationwide.com/financial-professionals/blog/planning-guidance/
[6] https://keenwealthadvisors.com/insights/7-top-retirement-tips-for-2024
[7] https://www.asppa-net.org/news/2024/9/retirement-income-at-center-of-dc-plan-trends/
[8] https://smartasset.com/retirement/top-11-retirement-strategies
[9] https://www.360financial.net/post/financial-planning-for-retirement
Sam Saleh is an investment adviser representative with Savvy Advisors, Inc. (“Savvy Advisors”). Savvy Advisors is an SEC registered investment advisor. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy.
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
Savvy Wealth Inc. is a technology company. Savvy Advisors, Inc. is an SEC registered investment advisor. For purposes of this article, Savvy Wealth and Savvy Advisors together are referred to as “Savvy”. All advisory services are offered through Savvy Advisors, while technology is offered through Savvy Wealth. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors
