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It’s better to fund your retirement through multiple sources of income rather than just one. This makes your finances more stable.
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Guaranteed sources such as Social Security and pensions can fund predictable expenses. Part-time jobs and investments can fill the gap.
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Other options include annuities and reverse mortgages, although both have significant drawbacks.
Retirement stability isn’t just about how much money you save, it’s about how that wealth generates income throughout retirement.
Determining where your cash flow will come from can simplify retirement planning and reduce anxiety later on.
By 2026, retired workers will receive an average of about $2,071 per month from Social Security, or about $24,850 per year. It often forms the basis of a retiree’s income plan and may be the only source of income to keep up with inflation over a lifetime.
Important when you collect benefits: permanently reduce your monthly spending starting at age 62, and waiting until age 70 to maximize your monthly spending through delayed retirement credits.
In addition to their own benefits, couples should also consider potential spousal/survivor benefits.
As of 2022, the median defined benefit pension payment will be about $11,040 per year, although only about one-third of seniors still receive income from a defined benefit plan. Government pension payments are much higher — about $25,000 a year for state and local workers — in part because many public employees are not covered by Social Security.
Monthly payments typically continue throughout the lifetime of the retiree (and often their spouse), so the stability is attractive to them, providing a regular income without requiring the retiree to sell investments to cover essential expenses.
Defined contribution retirement plans like 401(k)s and IRAs often constitute the largest source of retirement income. According to the Federal Reserve’s latest Survey of Consumer Finances, the median retirement account balance for households ages 65-74 is $200,000. For those 75 and older, that’s $130,000. At a 4% withdrawal rate, that’s $8,000 and $5,200 per year, respectively.
Tax treatment and withdrawal orders are important factors to consider. Withdrawals from traditional 401(k), 403(b) and traditional IRAs are taxed as ordinary income, while qualified withdrawals from Roth accounts are tax-free.
You typically want to withdraw funds from taxable accounts first and then from tax-deferred retirement accounts. This way, you can keep your tax-free Roth account intact for as long as possible. This can put you in a lower tax bracket, preserving tax-free income for later (or for heirs).
Although recommendations vary, consider withdrawing about 3.9% to 4% of your investable assets in your first year of retirement and then adjusting that amount each year for inflation.
Beginning at age 73, you are required to take required minimum distributions from most retirement accounts. If you have a 401(k) or similar plan and are still working at age 73, you can defer RMDs until your retirement year. Withdrawal amounts are based on life expectancy tables published by the IRS.
You don’t need to withdraw RMDs from a Roth IRA or Roth 401(k).
Income from taxable investments can also fund retirement: Dividends and interest from stocks, bonds, and certificates of deposit; rental income from real estate (rental properties or real estate investment trusts); and capital gains realized through tax-efficient asset management can all supplement expenses.
Many older adults continue to work part-time during retirement, whether by choice or necessity.
When traditional sources of retirement income fall short, consulting, freelancing, teaching, coaching, and flexible hourly work can fill the gap with extra cash.
Buying an annuity essentially converts a large portion of your savings into a guaranteed lifetime income, just like a pension. But their upfront costs can be high and prevent these funds from earning potentially higher returns elsewhere.
If you need emergency cash, withdrawals from a permanent life insurance policy can also serve as retirement income, as well as a tax-advantaged policy loan or transportation settlement.
A reverse mortgage allows you to borrow against the equity in your home without having to make monthly mortgage payments. You (or your heirs) don’t have to repay the money until you sell or leave the home permanently.
However, reverse mortgages can be complex and come with their own risks, including high upfront costs, interest that compounds over time, and the possibility of default if taxes, insurance, management fees, and home maintenance don’t keep up.
To get the most out of your retirement assets, sort to the maximum extent possible. Start withdrawing taxable savings while deferring tax benefits and Social Security income to ensure higher inflation-adjusted benefits later.
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early retirement periodspending cash and taxable investments first.
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delay social security If possible, live to be 70 years old.
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consider work If you still need part-time income to make ends meet.
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After social security beginscovering the gap in traditional IRA/401(k) withdrawals.
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When RMD startswithdraw the RMD first, then withdraw more from a traditional IRA/401(k) as needed.
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Click on your Roth IRA/Roth 401(k) latermainly for tax control and one-time large expenses.
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Click for other sources: Annuities, insurance policies, and home equity can be used to bridge the gap or generate discretionary income.
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