Retirement Income Planning Checklist: 5 Questions To Answer Right Off The Bat

Retirement planning is something that people should always think about, but the way that they think about it and its level of precision changes as they approach retirement. Earlier in life, you’re trying to figure out how much to save and put towards retirement. Within 5-10 years of desired retirement age, you should be thinking about the below checklist to prepare for a smooth transition to retirement:

1. How much money do I need in retirement and where is that money coming from? 

Let’s start with the question that’s on everyone’s minds, AKA the money question. The foundation of your retirement planning is determined by how much income you anticipate needing. If you started to plan for retirement early in your career, you likely focused on how much to save and how to invest, but you didn’t think as much about what life would look like in retirement or know when you’d be ready to pull the professional plug. 

Having a general idea of what you’d like your future to look like is really important because it’ll give you a sense of how long you’ll need to rely on your portfolio to replace the income you were accustomed to. Perhaps during retirement, you’re looking to stop working altogether (no, really) and either maintain or increase your lifestyle. Maybe you’d like to spend your days post-career simplifying your life, focusing on your interests, or traveling. While the sky’s the limit for your retirement pursuits, it’s also critical to be honest with yourself. Dream big, but dream intelligently too.

The two primary sources of income to consider when retirement planning are:

• Fixed income– These are your pensions, social security, and annuity payments. These should form the base of your retirement income as “fixed” amounts and help you plan the amount needed from variable sources.
• Variable income– This is your income and interest generated by investments, portfolio withdrawals, future Required Minimum Distributions (RMDs) from tax-deferred retirement accounts, and Health Savings Account withdrawals.

How much fixed income vs. variable income you should have in retirement will greatly depend on factors that may be out of your control, like employer benefits and government policy surrounding social security. Thankfully, there are people out there who can help you assess what to expect and remove the anxiety of the unknown. 

2. What should be included in my post-retirement budget?

It’s important to take into consideration how financial needs may adapt and shift over time as we age. For example, as you get older and your personal health changes, the funds that used to be allocated for travel and leisure might be replaced by increased healthcare expenses. That’s why when considering your retirement income needs, you should take every potential expense into account like:

• Taxes
• House repairs and maintenance
• Travel
• Healthcare
• Charitable contributions 

It’s also crucial to leave room for extra money in your budget for the unexpected things that come up or shifting priorities as your family changes and grows. You may find yourself wanting to transfer some of your wealth to your children immediately, care for extended family, or want to provide for things like education for the next generation. Don’t forget to take into account any outstanding debts that you may owe as well. By anticipating and estimating future monthly expenses, you’ll have the ability to quickly adjust your lifestyle to fit into what works best for you in the long run.

3. Should I tweak my investment strategy?

There’s no denying that retirees need some kind of stability in their portfolios as they begin to rely on their portfolios to sustain their lifestyle. The reality is that the cookie-cutter 60/40 mix between stocks and bonds doesn’t create the kind of income that most people need in retirement, nor are bonds providing the kind of inflation protection that you need for a long retirement. 

While the right allocation is highly individual and dependent on your unique circumstances, a good rule of thumb is to plan to have 12-18 months of cash at the start of your retirement to maintain your lifestyle and weather the ups and downs of the market, reducing sequence of returns risk.  

A portfolio should not be “set it and forget it” as you plan for your unique needs and circumstances–a wealth advisor can help you navigate a sea of uncertainty and adjust your allocation to ensure that you have a high likelihood of success in retirement, all while managing the tax impact of reallocating taxable portfolios. 

4. How should I think about taxes when planning for retirement income?

While a lot of this discussion depends on the particular investment vehicles you used to fund your retirement, it’s important to manage all taxable income where possible and consider the impact taxes will have on the actual amount available to fund your lifestyle. Unfortunately, your income leading up to retirement and through retirement will have some unexpected implications for your retirement expenses. For example:

• Your taxable income 2 years prior to your Medicare eligibility will determine your Medicare premiums. 
• Your taxable income determines the threshold for deductibility of some expenses, like medical. 

Most people have a mix of investment vehicles dedicated to funding their retirement lifestyle. If you invested in a Roth IRA, the money was taxed before going into the account. Therefore, no taxes need to be paid during the withdrawal, even on the earnings. In accounts such as traditional IRAs and 401ks where contributions have been made with pre-tax dollars, withdrawals are recognized as ordinary income and will be taxed as such. When looking at tax-deferred balances in non-Roth retirement accounts, you should mentally reduce the amount available for lifestyle expenses by 30% to account for income taxes. 

Many people will have taxable investment accounts that are also part of the retirement income picture. Unlike withdrawals from tax-deferred retirement accounts (which have benefits in the form of deferred income taxes while you accumulate savings for retirement), realizing capital gains to create cash for your needs in retirement will incur taxes at a lower tax rate, usually 15-20% under current tax law. Your taxable portfolio may also generate an income stream that will add to your taxable income. 

You’re responsible for paying taxes, but you no longer have the benefit of having taxes withheld from every paycheck like you would have when you were working. An advisor can partner with your accountant to help you understand the different sources of taxable income in your portfolio and how to plan for making estimated taxes, removing the hassle of going it alone.

5. What should I be doing now? 

While we can’t deny that long-term, patient investing is the way to go, that doesn’t mean your portfolio should go on auto-pilot. Your wealth plan must adapt and change over time, aligning with your life and goals as you and the world evolve. Our collective mastermind of wealth management professionals can help you navigate a sea of uncertainty, communicate with complete transparency, and manage your tax impact to ensure that you have a high likelihood of success in retirement.

Look, we know that you’re used to doing it all yourself. This is why at Monument, we prioritize serving YOU and your entire retirement vision during our strategic Private Wealth Design process. During this series of meetings, we’ll craft a completely customized and collaborative plan specific to your needs and desires. You’ll never be left in the dust because retirement stability should be a top priority for everyone, and straightforward, zero B.S. advice is what helps secure a strong financial future.