Retirement is one of those concepts that might be on your mind from the very first time you step into a workplace. Nevertheless, people often wait until later in their working lives, such as in their 30s and 40s, before they start truly focusing on a retirement plan. While it’s still possible to save for retirement from any point, it becomes even more important to successfully manage a retirement income strategy if you’re starting later in your career.
For most of us, a core part of retirement involves spreading out savings over time to make the process more manageable. That can come in many forms, such as withdrawing a specific amount every month, setting up an annuity, drawing on Social Security or a company pension, or even setting up a reverse mortgage. Each method has its advantages, and the ideal retirement plan often incorporates several approaches. Preparing for retirement involves anticipating your needs and then determining the best revenue streams for your needs post-retirement. Read on to learn more about the process.
Anticipating Your Needs Before Retirement
Ultimately, retirement is about living a comfortable life, free from worries about obtaining new streams of income. This is one reason why it’s helpful to take the time to plan for your future and anticipate your needs while you’re working. One first step in this process is figuring out how much money you’ll need to save. In brief, aim to have at least 10 times your annual income at the time of your retirement saved up.
The way you access those funds can have a large impact on their longevity. If you have the money sitting in a bank account, you may find that it’s easier to spend, and you may run your balance down faster than you intended. This could potentially leave you scrambling at a time when you’d rather be enjoying some well-earned relaxation. The right distributions can enable you to maintain a steady flow of income while keeping the bulk of your retirement portfolio intact. But, you’ll still be able to access it as needed in the event of significant life-changing events or an urgent need to cover your own costs or family emergencies.
Establishing and Managing Your Income Streams With a Strong Distribution Plan
While most U.S. workers can draw on Social Security for some of their income needs, many retirees will need a significant amount of savings put away to supplement this income. The Financial Industry Regulatory Authority identifies several important sources of retirement income, including the following:
- Benefits Plans: These plans are generally associated with your employer and vary from person to person, depending on the job market and the career. In the most generic scenarios, they may be IRA or 401(k) matching programs. Some employers still offer pension programs for long-serving employees, especially those who are represented by unions that have fought to make pensions a key benefit for their members. Nevertheless, these programs are in many ways outside of the individual’s control, so not everyone can rely on a job-based benefit plan to maximize their retirement readiness.
- Defined Benefits: These are voluntary programs that individuals enter with various companies. The most basic of these is an annuity, which essentially functions as an investment with a guaranteed payout schedule. When you place your investment into an annuity, the issuing company will later provide regular checks that serve as a reliable income stream that can supplement Social Security while protecting you against withdrawing large amounts of your retirement savings. Fidelity suggests using these programs to manage your day-to-day expenses so that you preserve your core assets for emergencies or to build up your estate.
- Equity-Based Programs: Generally, these programs are tied to real estate, such as your home. For many people, downsizing is a normal part of retirement, and they may sell their homes to use the equity for retirement funding. Another common approach is to establish a reverse mortgage, which involves a bank giving you monthly payments in exchange for being repaid upon the sale of your. Both of these options rely on the housing market, which can be volatile even though it’s generally safe.
As mentioned above, the best retirement plans include multiple sources of income. If you have a reverse mortgage and company-based pension plan, you’re more protected against housing market crashes. Meanwhile, setting up an annuity can protect you in the event of Social Security shortfalls in the future or stock market volatility compromising your portfolio’s value.
Although the future is unpredictable, careful planning may protect you from some potential pitfalls. Retire By 40 highlights the benefits of diversifying your retirement portfolio, which lets you avoid the proverbial “putting all your eggs in one basket.” As each person’s situation is unique, it’s a good idea to consult a financial professional about the best way to arrange your assets in advance of retirement.
Resource Links
“3 Keys to Your Retirement Income Plan” via Fidelity
“Sources of Retirement Income” via FINRA
“How to Diversify Your Retirement Portfolio” via Retire by 40