Retirement changes an important part of your financial life: instead of receiving a regular paycheck, you may need to create income from several different sources.
Social Security, pensions, retirement accounts, savings, annuities and other assets may all play a role.
A retirement income strategy is a plan for how those different sources of money may work together to help support your needs throughout retirement.
The goal is not simply to determine how much money you have accumulated. It is to consider how that money may be turned into income, when different sources should begin, and how much flexibility you may need along the way.
One of the first steps is identifying the income sources you expect to have in retirement.
These may include:
Some of these sources may provide predictable payments, while others may fluctuate or require you to decide when and how much to withdraw.
Understanding those differences can help you see how the pieces of your retirement income picture may fit together.
Knowing where your income may come from is only one side of the equation.
It is also important to consider what you expect to spend.
Some expenses may be relatively predictable, such as housing, utilities, insurance and everyday living costs. Others may vary considerably over time.
Healthcare, travel, home repairs and unexpected expenses can all affect the amount of income you may need.
Rather than focusing on one number, it can be helpful to separate expenses into essential needs and discretionary spending.
That can provide a clearer picture of how much dependable income you may want to have available for the expenses that matter most.
For many retirees, Social Security becomes an important source of retirement income.
The age at which you begin receiving benefits can affect the amount of your monthly benefit. Your personal circumstances, other sources of income, retirement timing and financial needs can all be relevant when considering when to begin benefits.
Social Security may represent one part of a broader retirement income strategy rather than the entire plan.
Retirement accounts such as 401(k)s and IRAs are often accumulated over many years.
Once retirement begins, the question changes from:
How much can I save?
to:
How should I use what I've accumulated?
Withdrawals from retirement accounts can provide income, but the amount withdrawn and the timing of those withdrawals may affect how long the assets last.
Taxes, required minimum distributions when applicable, market conditions and other considerations may also influence withdrawal decisions.
One of the biggest questions in retirement planning is how much of your regular expenses you would like covered by predictable sources of income.
Social Security and pensions may provide part of that foundation.
For some people, an annuity may also be considered as a way to create an additional stream of income.
Certain annuities can provide income for a specified period or, depending on the contract and income option selected, for life.
Annuity guarantees are subject to the claims-paying ability of the issuing insurance company, and contract terms, liquidity provisions and benefits can vary significantly.
Creating retirement income does not necessarily mean converting every asset into a regular payment.
Liquidity can remain important throughout retirement.
Unexpected medical expenses, home repairs, family needs or other circumstances may require access to money beyond normal monthly income.
A retirement income strategy may therefore include both sources designed to generate income and assets that remain accessible for future needs.
Finding an appropriate balance between income and flexibility will depend on individual circumstances.
Retirement can potentially last decades, which means the cost of everyday goods and services may change substantially over time.
A retirement income strategy should consider not only what your expenses are today, but how your purchasing power could change in the future.
Different sources of retirement income may respond to inflation differently.
That is another reason relying entirely on a single source of income may not be appropriate for every retirement plan.
Not every source of retirement income is taxed in the same way.
Withdrawals from certain retirement accounts, Social Security benefits, pensions, annuity payments and other income may receive different tax treatment depending on individual circumstances.
Taxes can therefore affect the amount of retirement income you actually have available to spend.
Tax considerations can be complex, so individuals should consult an appropriate tax professional regarding their particular circumstances.
A retirement income strategy does not necessarily need to remain unchanged for the rest of your life.
Your expenses, health, family circumstances, financial markets and priorities may change.
Reviewing your strategy periodically can help you understand whether your current sources of income still align with your needs.
Major life events can also provide a good reason to revisit the plan.
A retirement income strategy is ultimately about coordination.
You may have Social Security providing one portion of your income, retirement accounts providing another, personal savings available for flexibility, and potentially an annuity or pension providing additional predictable income.
The objective is to understand what each source is designed to do and how the different pieces may complement one another.
For a broader look at building income for retirement, read CDA's Creating Retirement Income That Lasts.
Retirement planning is about more than reaching a particular account balance.
Eventually, the question becomes:
How will the money I've accumulated support the life I want to live in retirement?
A thoughtful retirement income strategy can help organize the different resources available to you and provide a clearer picture of how they may work together over time.
At CDA of America, we believe understanding your options is an important part of making informed financial decisions.
For decades, CDA has worked with individuals, families and businesses to help them better understand insurance, retirement and financial strategies designed around their goals and priorities.
Have questions about retirement income strategies?
This material is provided for educational and informational purposes only and is not intended as investment, tax or legal advice. Annuity guarantees, income payments, features, withdrawal provisions and other contract terms vary by insurance carrier and product. Guarantees are subject to the claims-paying ability of the issuing insurance company. Withdrawals or distributions may be subject to applicable taxes, surrender charges and other contract provisions. Consult appropriate financial, tax or legal professionals regarding your individual circumstances.