Retirement

Think Big When Planning Your Retirement Income

There is more to retirement planning than “saving more” or “working longer.”

When thinking about retirement planning, an important consideration for investors is how much income they’ll be able to generate. It can be scary to think about giving up a paycheck and trusting that your assets will last the rest of your life, or perhaps even beyond. Knowing your retirement investments have the ability to provide enough income to cover at least a significant portion of your expenses is a key to keeping you from outliving your retirement funds.

However, there is significantly more to successful retirement income planning than just looking for how to generate the most income. It’s important to understand holistically what you want to get from your retirement, how you approach managing your finances, and which types of investments you choose to make if you want to create a retirement plan that can support your goals.

Defining Your Retirement Goals

While you could embark on your retirement planning without first defining your retirement goals, it’s easy for this approach to backfire. It’s tempting to simply seek the highest returns, assuming that by amassing as much as you can, you’ll be able to figure out what you want to do once you’re retired. Unfortunately, this can lead you to build pitfalls into your plan—such as taking unnecessary risk or chasing “hot” investments—that can work against you in the long run.

Different goals require drastically different sums to accomplish. For some investors, plans may be aimed solely at maintaining their current lifestyle throughout their sunset years. For others, the goal may be to leave a legacy, requiring a plan that can produce income well past retirement’s end. Being able to define what you want is the first step in being able to estimate your cost of living, which is necessary when you begin planning the income you’ll need for a successful retirement.

Understanding Your Spending

While estimates based on your goals are important as a basis for your planning, you should also calculate the demands of your expenses as you approach retirement to help ensure a smooth transition. These can help you understand how well your planning for larger goals meshes with how you’ll be extracting funds, and what type of adjustments you can make if you find you’re ahead or behind your plan.

This will mean looking at your current costs of living — for example, you’ll certainly want to include:

  • Your monthly grocery bill
  • Your monthly energy and utilities bill
  • Your debts (car loans, credit cards, mortgage)
  • Your tax liabilities
  • Your insurance and medical costs
  • Discretionary spending (movies, TV, books, meals out, travel, etc.)

Remember that some of your costs may change immediately after retirement. For example, if you’re no longer commuting to work, you may well see spending on gas drop. As such, it can be helpful to look at expenses again a few months into your retirement to see how your estimates matched.

In an ideal world, you would be lucky enough to have sufficient retirement income to cover the costs you do have with some room to spare. If so, it may be easier to treat yourself to some of retirement’s non-essential rewards, such as fine wines, a boat, exotic vacations, or a classic automobile, as you’re continuing to see your funds grow. However, it’s wise not to get too comfortable even in this position, as you may find retirement grow more and more costly with time.

Anticipating Change

It's clear then that there is more to retirement income planning than simply calculating your current expenses if you’re seeking to maintain or improve your lifestyle throughout retirement. Many factors might affect your income, particularly the income your retirement funds generate, including:

  • Inflation: Inflation is, simply, too much money chasing too few goods and services. This generally results in increasing prices, which reduces cash’s purchasing power. Assuming inflation continues over time, a dollar today won’t buy a dollar’s worth of goods and services years down the line. Inflation affects all forms of savings, especially investments that provide fixed income streams. /li>
  • Increased medical costs: It’s basic biology that our bodies are more prone to injury and illness as we age. So, it is reasonable for retirees to assume they will face emergency or unplanned medical costs more often in their futures. Historically, medical costs have experienced higher inflation than other categories, so it’s important to plan ahead.
  • Rising (or falling) interest rates: Bond investors’ future income may be affected by changes in bond yields, which typically fall as bond prices rise, and rise as bond prices fall. You can think of bond prices and yields as sitting on the opposite ends of a seesaw; as one factor rises, the other falls. The basic reason is this: if bond yields rise, lower interest rate bonds become less attractive, they must sell at a discount, and vice versa.

How You Save Impacts How You Can Spend

The types of accounts you use to save for retirement can impact the income you are able to take from your portfolio. This is because various retirement savings accounts can result in different kinds of tax burdens. Depending on your time horizon, cash flow needs and other factors impacting your tax situation, these decisions can impact your retirement savings strategy.

For example, the funds deposited in a Traditional 401(k) or an Individual Retirement Account (IRA) are not taxed as income when contributed, and you won’t pay capital gains or dividend taxes for the investments in your account. Instead, the income you apply to a Traditional 401(k) is tax-deferred. Your investments grow tax-deferred as long as you don’t remove them from your account; however, after age 59.5, withdrawals are taxed at your ordinary income rate. When you have a Roth 401(k) or Roth IRA, you pay ordinary income tax on the money before it’s contributed. Roth accounts still apply penalties for withdrawals before age 59.5 but when you are eligible to take the money out after age 59.5, you pay no taxes.

This means that when you are planning how to generate retirement income with these types of accounts, you should always remember to factor in the tax that will need to be paid. For example, you may decide that a Roth account makes more sense if your income tax rates in retirement are likely to be greater than they are currently. However, only a close consideration of all the variables at play may help you decide this question, which is one reason working with an investment adviser can provide an expert perspective to help make sure you’ve considered the key questions.i

Required minimum distributions (RMDs) are another factor to consider with IRAs. Past the age of 70.5, people are required to withdraw at least a specific percentage from tax-deferred retirement accounts or face a penalty of 50% of the RMD value not distributed. This is an important factor to consider as it may have implications on what accounts you use to generate your income. Again, there are many complexities around both how these RMDs are calculated and what accounts they apply to, which can make it beneficial to work with both a professional tax advisor and money manager capable of guiding you through them.

Asset Allocation

Similar to how the accounts used to fund your retirement can impact income, which types of investments you have will also factor in to the income your funds generate. Getting asset allocation right when planning your retirement may ultimately make the difference between having the income you need to serve your retirement goals and running out of it just when you need it most.

It is important to remember that all asset classes carry some risks, but all these risks come with trade-offs. For example, stocks are prone to short-term volatility, but have historically provided higher growth (capital appreciation) over long time periods than any other similarly liquid asset.

Bonds, alternatively, have shown lower growth as a class but tend to be less volatile in the short term. But, this does not mean that they are risk-free. There is usually some risk that the bond issuer will not repay you, or that interest rates will rise and thereby depress your bond’s value in the market. Perhaps more significantly, if you’re a long-term investor, holding too much of your portfolio in bonds can leave you at risk for not having enough growth to reach your investing goals. As such, they can be very useful for generating income, but less useful in helping your account keep pace with rising costs of living.

Finally, there are annuities. If you’re approaching or in retirement, you may have had a salesperson try to get you to purchase one at some point. While lofty claims of “income for life” and guarantees of safe investment can make them attractive for investors that need income in retirement, annuities come with some distinct disadvantages. Basically, they tend to be expensive and complicated forms of longevity insurance, with high fee burdens that can limit their usefulness. Often times, the income-generating goals of annuities can be accomplished through other products for much lower costs. In our experience, there can be a disconnect between what people assume their annuity provides (like “protection from loss”) and how their annuity actually works.

In the end, getting asset allocation right is about balancing risk, growth potential and income generation to provide yourself with a plan that’s both flexible and sustainable for your situation. For investors with longer time horizons, this may mean being steely-eyed in the face of a volatility. It is the long-term ability to achieve your goals that ultimately counts, which is why the guidance of a professional investment adviser in addressing these intricacies can help.

Retirement Income Planning with Fisher Investments

Our retirement experts can assist investors with all aspects of income planning, whether retirement is near or far. Our investment planning advice, which takes a global perspective, is paired with a firm-wide focus on offering exceptional customer service. Our goal is not only to develop a portfolio that’s aligned with your retirement goals, but to also provide the information you need to be confident in your strategy in a way that’s easy for you to understand.

Whether you are already in your retirement or are considering the investment options that will get you there, let us assist you today.


[i] The contents of this article should not be construed as tax advice. Please contact your tax professional.