For investors approaching retirement, it is important to begin thinking about retirement income planning. This involves a mindset shift from accumulating an investment portfolio designed for growth to creating a portfolio of retirement income designed to help you pursue your lifestyle goals.[i]
Goals. Identify what you want to get out of retirement. If you want to travel the world or pay for grandchildren’s college educations, your income needs will differ from someone who wants to simplify their life in retirement and focus on hobbies at home.
Income sources. Anticipate your sources of retirement income, such as Social Security, pension, fixed annuities, and non-guaranteed income from investments. Carefully evaluate your options for when to begin claiming Social Security. For some people, it makes financial sense to claim benefits as early as possible; for others, it’s beneficial to defer benefit payments.
Expenses. Estimate your fixed expenses and discretionary expenditures. Your retirement income plan should also address your anticipated needs for health care and long-term care in the future. For many retirees, health care is one of the most significant expenses they need to budget for.[iii] Consider also the potential impact of future inflation on your buying power.
Market volatility. Depending on your risk tolerance and goals, your plan may be more focused on investing for potential gains during retirement, investing for both growth and income, or taking a more conservative approach using a portfolio comprised primarily of bonds, insurance products, and other vehicles traditionally viewed as less risky.[iv]
Tax considerations. It is important to understand how retirement income will be taxed during retirement; not all income sources are treated equally. While it is possible that only part of your Social Security income will be taxable, you should generally expect to pay taxes on pension income, distributions from employer-sponsored retirement accounts, traditional IRAs, and other taxable investments. Work with your tax and financial professionals to create a retirement income plan that considers the tax implications of your income needs and your plans for charitable gifting, as there may be tax advantages to taking a more strategic approach to withdrawing assets.[v]