As retirement gets closer, many people begin to worry about how they will find the funds they need to replace their paychecks after they've stopped working. What will serve as their income? Will they have enough to live on day-to-day? Will their money last long enough?
The key to relieving these worries is to develop a retirement income plan. Below are five factors that you may not have considered that will help you build that plan and ease any pre-retirement concerns.
#1: It's easier to plan when you translate savings into monthly income. Rather than looking at the big savings balance on your retirement account statements, focus on what you will need in terms of monthly income when you stop working. By developed an anticipated "monthly retirement budget" for yourself, you'll be able to tailor your savings strategy now to better suit your future needs.
In fact, recent research from Voya Financial found that 80 percent of working Americans report they would feel more confident if they knew what their retirement savings would translate into in terms of future monthly income. There are a slew of new financial resources available today, like Voya's myOrangeMoney, that can help you figure out your personal expected monthly income based on your savings path.
#2: Be mindful of unexpected risks to your income. While they aren't fun to think about, often-overlooked issues like market risks, inflation, taxes and unexpected expenses from health issues can all take a toll on a retirement plan. Another overlooked consideration is whether your retirement funds will last as long as you live. When living off of savings, Social Security or other income sources, life's unexpecteds can have an oversized impact on your finances. A well thought-out plan should be diversified, have an element of guaranteed income through products such as annuities, and include emergency savings funds. In addition, savings should be in different tax buckets (after-tax, pre-tax, etc.) to help minimize your tax exposure in retirement.
#3: Your various retirement income sources may be taxed differently. When trying to calculate your retirement income, consider that all of your various sources (Social Security, 401(k), pension, IRAs, investments, etc.) will be subject to taxation in some capacity. As such, it is crucial to determine your after-tax net income to understand how much income you can actually expect in retirement. Many people assume Social Security is tax-free, but the majority of Americans will have to pay some sort of taxes on these benefits. In fact, most individuals should expect that 85 percent of their Social Security benefit will be taxed.
Beyond Social Security, there is good reason to allocate retirement funds into different tax buckets, including after-tax Roth savings vehicles, in which an investor pays taxes on the cash before it's invested. The more time you have for the money in a Roth to compound before tapping it, the more appealing a Roth can be for individuals. Remember, tax codes may change over the course of your retirement, but knowing your overall tax liability will serve as a good first step as you develop your income plan.
#4: Bond investments are not without risk. Many people assume they cannot lose money in bond investments, but this misconception can get retirees into trouble when they go to sell their holdings if they depend on bonds as a source of income (which many do). Depending on interest rates, the duration of the bond and how long you hold it, there is a chance that you may face a loss at the end of the day. As with any investment, it is essential to diversify and plan for the long-term. A common way to do this is to use a laddering approach to build a bond portfolio, which means that all the selected bonds will have significantly different maturity dates. This will help to ensure greater stability of income over time.
#5: Even with Medicare coverage, health care costs can add up and eat into your retirement income. A 2014 Voya study found that paying for health issues was the biggest unexpected challenge for retirees. It is often a hard wake-up call to realize that Medicare does not cover all medical expenses. Many deductibles, prescription costs and other expenses must be paid out-of-pocket by retirees. While I wish there were a simple answer, health care decisions in retirement are complex. Bottom-line: Approach retirement with funds set aside to cover health costs.
These five points can seem overwhelming to many of my clients, but with discussion and planning, we figure out a road map that makes them feel more comfortable with their situations and future plans. Future income planning is a key component of retirement readiness, so tackling these issues head-on can help deliver the retirement you want and deserve.
Voya Retirement Coach Jacob Gold is a third generation financial advisor with Voya Financial Advisors, Inc., a broker-dealer of Voya FinancialTM. He is a published author of "Financial Intelligence; Getting Back to Basics after an Economic Meltdown", which was published in August 2009. Gold is a CERTIFIED FINANCIAL PLANNER™ practitioner and Series 7, 24 and 66 securities registered.
Securities and Investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC)